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EX-31.1 - SECTION 302 CEO CERTIFICATION - NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/nrufy2020q2form10-qxex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/nrufy2020q2form10-qxex322.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/nrufy2020q2form10-qxex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/nrufy2020q2form10-qxex312.htm
EX-10.2 - AMENDED REVOLVING CREDIT AGREEMENT MATURING NOVEMBER 28, 2023 - NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/nrufy2020q2form10-qex102.htm
EX-10.1 - AMENDED REVOLVING CREDIT AGREEMENT MATURING NOVEMBER 28, 2022 - NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/nrufy2020q2form10-qex101.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
__________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2019
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

Commission File Number: 1-7102
__________________________
NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
__________________________
District of Columbia
 
52-0891669
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
20701 Cooperative Way, Dulles, Virginia, 20166
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (703) 467-1800
__________________________
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
7.35% Collateral Trust Bonds, due 2026
 NRUC 26
New York Stock Exchange
5.50% Subordinated Notes, due 2064
NRUC
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer x Smaller reporting company¨ Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transaction period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨  No x
 



TABLE OF CONTENTS
 
  
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 

i


INDEX OF MD&A TABLES
 
Table
  
 Description
 
Page
1
 
Summary of Selected Financial Data
 
3

2
 
Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
10

3
 
Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
13

4
 
Non-Interest Income
 
16

5
 
Derivative Gains (Losses)
 
16

6
 
Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
 
17

7
 
Non-Interest Expense
 
19

8
 
Loans Outstanding by Type and Member Class
 
20

9
 
Historical Retention Rate and Repricing Selection
 
21

10
 
Total Debt Outstanding
 
22

11
 
Member Investments
 
24

12
 
Collateral Pledged
 
25

13
 
Unencumbered Loans
 
25

14
 
Equity
 
26

15
 
Guarantees Outstanding
 
27

16
 
Maturities of Guarantee Obligations
 
28

17
 
Unadvanced Loan Commitments
 
28

18
 
Notional Maturities of Unadvanced Loan Commitments
 
29

19
 
Maturities of Notional Amount of Unconditional Committed Lines of Credit
 
30

20
 
Loan Portfolio Security Profile
 
31

21
 
Loan Exposure to 20 Largest Borrowers
 
33

22
 
Troubled Debt Restructured Loans
 
34

23
 
Allowance for Loan Losses
 
35

24
 
Rating Triggers for Derivatives
 
36

25
 
Available Liquidity
 
37

26
 
Committed Bank Revolving Line of Credit Agreements
 
38

27
 
Short-Term Borrowings—Funding Sources
 
40

28
 
Short-Term Borrowings
 
40

29
 
Issuances and Repayments of Long-Term and Subordinated Debt
 
41

30
 
Principal Maturity of Long-Term and Subordinated Debt
 
41

31
 
Projected Sources and Uses of Liquidity from Debt and Investment Activity
 
42

32
 
Credit Ratings
 
43

33
 
Interest Rate Gap Analysis
 
45

34
 
Adjusted Financial Measures—Income Statement
 
46

35
 
TIER and Adjusted TIER
 
47

36
 
Adjusted Financial Measures—Balance Sheet
 
47

37
 
Debt-to-Equity Ratio
 
47

38
 
Members’ Equity
 
48


ii


PART I—FINANCIAL INFORMATION

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A)
FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains certain statements that are considered “forward-looking statements” within the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity” and similar expressions, whether in the negative or affirmative. All statements about future expectations or projections, including statements about loan volume, the appropriateness of the allowance for loan losses, operating income and expenses, leverage and debt-to-equity ratios, borrower financial performance, impaired loans, and sources and uses of liquidity, are forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, actual results and performance may differ materially from our forward-looking statements due to several factors. Factors that could cause future results to vary from our forward-looking statements include, but are not limited to, general economic conditions, legislative changes including those that could affect our tax status, governmental monetary and fiscal policies, demand for our loan products, lending competition, changes in the quality or composition of our loan portfolio, changes in our ability to access external financing, changes in the credit ratings on our debt, valuation of collateral supporting impaired loans, charges associated with our operation or disposition of foreclosed assets, technological changes within the rural electric utility industry, regulatory and economic conditions in the rural electric industry, nonperformance of counterparties to our derivative agreements, the costs and effects of legal or governmental proceedings involving us or our members and the factors listed and described under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019 (“2019 Form 10-K”). Except as required by law, we undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date on which the statement is made.
INTRODUCTION

National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. As a member-owned cooperative, CFC’s objective is not to maximize profit, but rather to offer members cost-based financial products and services. CFC funds its activities primarily through a combination of public and private issuances of debt securities, member investments and retained equity. As a Section 501(c)(4) tax-exempt, member-owned cooperative, we cannot issue equity securities.

Our financial statements include the consolidated accounts of CFC, National Cooperative Services Corporation (“NCSC”), Rural Telephone Finance Cooperative (“RTFC”) and subsidiaries created and controlled by CFC to hold foreclosed assets resulting from defaulted loans or bankruptcy. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. CFC and its consolidated entities have not held any foreclosed assets since the quarter ended August 31, 2017. See “Item 1. Business—Overview” in our 2019 Form 10-K for additional information on the business activities of each of these entities. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities. All references to members within this document include members, associates and affiliates of CFC and its consolidated entities.

1



Our principal operations are organized for management reporting purposes into three business segments: CFC, NCSC and RTFC. Loans to members totaled $26,438 million as of November 30, 2019, of which 96% was attributable to CFC. We generated total revenue, which consists of net interest income and fee and other income, of $171 million for the six months ended November 30, 2019, compared with $153 million for the same prior-year period. The substantial majority of our total revenue is attributable to CFC. We provide information on the financial performance of each of our business segments in “Note 13—Business Segments.”

Management monitors a variety of key indicators to evaluate our business performance. The following MD&A is intended to provide the reader with an understanding of our consolidated results of operations, financial condition and liquidity by discussing the factors influencing changes from period to period and the key measures used by management to evaluate performance, such as net interest income, net interest yield, loan growth, debt-to-equity ratio, credit quality metrics and also non-GAAP measures. The MD&A section is provided as a supplement to, and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes in this Report, our audited consolidated financial statements and related notes in our 2019 Form 10-K and additional information contained in our 2019 Form 10-K, including the risk factors discussed under “Part I—Item 1A. Risk Factors,” as well as any risk factors identified under “Part II—Item 1A. Risk Factors” in this Report.
SUMMARY OF SELECTED FINANCIAL DATA

Table 1 provides a summary of consolidated selected financial data for the three and six months ended November 30, 2019 and 2018, and as of November 30, 2019 and May 31, 2019. In addition to financial measures determined in accordance with generally accepted accounting principles in the United States (“GAAP”), management also evaluates performance based on certain non-GAAP measures and metrics, which we refer to as “adjusted” measures. Certain financial covenant provisions in our credit agreements are also based on non-GAAP financial measures. Our key non-GAAP financial measures are adjusted net income, adjusted net interest income, adjusted interest expense, adjusted net interest yield, adjusted times interest earned ratio (“adjusted TIER”) and adjusted debt-to-equity ratio. The most comparable GAAP measures are net income, net interest income, interest expense, net interest yield, TIER and debt-to-equity ratio, respectively. The primary adjustments we make to calculate these non-GAAP measures consist of (i) adjusting interest expense and net interest income to include the impact of net periodic derivative cash settlements expense; (ii) adjusting net income, total liabilities and total equity to exclude the non-cash impact of the accounting for derivative financial instruments; (iii) adjusting total liabilities to exclude the amount that funds CFC member loans guaranteed by RUS, subordinated deferrable debt and members’ subordinated certificates; and (iv) adjusting total equity to include subordinated deferrable debt and members’ subordinated certificates and exclude cumulative derivative forward value gains and losses and accumulated other comprehensive income (“AOCI”). We believe our non-GAAP adjusted measures, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management evaluates performance based on these metrics, and certain financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on adjusted measures. See “Non-GAAP Financial Measures” for a detailed reconciliation of these adjusted measures to the most comparable GAAP measures.


2



Table 1: Summary of Selected Financial Data(1) 
 
 
Three Months Ended November 30,
 
 
 
Six Months Ended November 30,
 
 
(Dollars in thousands)
 
2019
 
2018
 
Change
 
2019
 
2018
 
Change
Statement of operations:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
287,037

 
$
281,253

 
   2%
 
$
577,052

 
$
559,744

 
   3%
Interest expense
 
(207,871
)
 
(204,166
)
 
2
 
(421,142
)
 
(414,397
)
 
2
Net interest income
 
79,166

 
77,087

 
3
 
155,910

 
145,347

 
7
Fee and other income(1)
 
3,842

 
3,595

 
7
 
14,783

 
7,506

 
97
Total revenue
 
83,008

 
80,682

 
3
 
170,693

 
152,853

 
12
Benefit for loan losses
 
1,045

 
1,788

 
(42)
 
1,015

 
1,897

 
(46)
Derivative gains (losses)(2)
 
183,450

 
63,343

 
190
 
(212,275
)
 
70,526

 
**
Unrealized gains (losses) on equity securities(1)
 
(114
)
 
(1,619
)
 
(93)
 
1,506

 
(2,345
)
 
**
Operating expenses(3) 
 
(24,769
)
 
(23,870
)
 
4
 
(50,098
)
 
(47,075
)
 
6
Other non-interest (expense) income
 
(929
)
 
(355
)
 
162
 
6,250

 
(7,849
)
 
**
Income (loss) before income taxes
 
241,691

 
119,969

 
101
 
(82,909
)
 
168,007

 
**
Income tax benefit (expense)
 
(91
)
 
(243
)
 
(63)
 
430

 
(303
)
 
**
Net income (loss)
 
$
241,600

 
$
119,726

 
102
 
$
(82,479
)
 
$
167,704

 
**
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operational financial measures
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted interest expense(4)
 
$
(222,021
)
 
$
(215,971
)
 
3
 
$
(446,335
)
 
$
(439,031
)
 
2
Adjusted net interest income(4)
 
65,016

 
65,282

 
 
130,717

 
120,713

 
8
Adjusted net income(4)
 
44,000

 
44,578

 
(1)
 
104,603

 
72,544

 
44
 
 
 
 
 
 
 
 
 
 
 
 
 
Selected ratios
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-charge coverage ratio/TIER(5)
 
2.16

 
1.59

 
57 bps
 
0.80

 
1.40

 
(60) bps
Adjusted TIER(4)
 
1.20

 
1.21

 
(1)
 
1.23

 
1.17

 
6
Net interest yield(6)
 
1.17
%
 
1.19
%
 
(2)
 
1.16
%
 
1.12
%
 
4
Adjusted net interest yield(4)(7)
 
0.96

 
1.01

 
(5)
 
0.97

 
0.93

 
4
Net charge-off rate(8)
 
0.00

 
0.00

 
 
0.00

 
0.00

 





3



 
 
November 30, 2019
 
May 31, 2019
 
Change
Balance sheet
 
 
 
 
 
 
Cash, cash equivalents and restricted cash
 
$
124,671

 
$
186,204

 
   (33)%
Investment securities
 
637,356

 
652,977

 
(2)
Loans to members(9)
 
26,438,181

 
25,916,904

 
  2
Allowance for loan losses
 
(16,520
)
 
(17,535
)
 
  (6)
Loans to members, net
 
26,421,661

 
25,899,369

 
  2
Total assets
 
27,566,601

 
27,124,372

 
  2
Short-term borrowings
 
4,789,024

 
3,607,726

 
  33
Long-term debt
 
18,434,451

 
19,210,793

 
  (4)
Subordinated deferrable debt
 
986,026

 
986,020

 
Members’ subordinated certificates
 
1,355,052

 
1,357,129

 
Total debt outstanding
 
25,564,553

 
25,161,668

 
  2
Total liabilities
 
26,408,707

 
25,820,490

 
  2
Total equity
 
1,157,894

 
1,303,882

 
  (11)
Guarantees(10)
 
794,723

 
837,435

 
  (5)
 
 
 
 
 
 
 
Selected ratios period end
 
 
 
 
 

Allowance coverage ratio(11)
 
0.06
%
 
0.07
%
 
(1) bps
Debt-to-equity ratio(12)
 
22.81

 
19.80

 
301
Adjusted debt-to-equity ratio(4)
 
5.78

 
5.73

 
5
____________________________ 
** Calculation of percentage change is not meaningful.
(1)Certain reclassifications have been made to prior periods to conform to the current period presentation.
(2)Consists of interest rate swap cash settlements income (expense) and forward value gains (losses). Derivative cash settlement amounts represent net periodic contractual interest accruals related to derivatives not designated for hedge accounting. Derivative forward value gains (losses) represent changes in fair value during the period, excluding net periodic contractual interest accruals, related to derivatives not designated for hedge accounting and amounts reclassified into income related to the cumulative transition adjustment recorded in accumulated other comprehensive income as of June 1, 2001, as a result of the adoption of the derivative accounting guidance that required derivatives to be reported at fair value on the balance sheet.
(3)Consists of salaries and employee benefits and the other general and administrative expenses components of non-interest expense, each of which are presented separately on our condensed consolidated statements of operations.
(4)See “Non-GAAP Financial Measures” for details on the calculation of these non-GAAP adjusted measures and the reconciliation to the most comparable GAAP measures.
(5)Calculated based on net income (loss) plus interest expense for the period divided by interest expense for the period. The fixed-charge coverage ratios and TIER were the same during each period presented because we did not have any capitalized interest during these periods.
(6)Calculated based on annualized net interest income for the period divided by average interest-earning assets for the period.
(7)Calculated based on annualized adjusted net interest income for the period divided by average interest-earning assets for the period.
(8)Calculated based on annualized net charge-offs (recoveries) for the period divided by average total outstanding loans for the period.
(9)Consists of the outstanding principal balance of member loans plus unamortized deferred loan origination costs, which totaled $11 million as of both November 30, 2019 and May 31, 2019.
(10)Reflects the total amount of member obligations for which CFC has guaranteed payment to a third party as of the end of each period. This amount represents our maximum exposure to loss, which significantly exceeds the guarantee liability recorded on our consolidated balance sheets. See “Note 11—Guarantees” for additional information.  
(11)Calculated based on the allowance for loan losses at period end divided by total outstanding loans at period end.
(12)Calculated based on total liabilities at period end divided by total equity at period end.

4



EXECUTIVE SUMMARY

Our primary objective as a member-owned cooperative lender is to provide cost-based financial products to our rural electric members while maintaining a sound financial position required for investment-grade credit ratings on our debt instruments. Our objective is not to maximize profit; therefore, the rates we charge our member-borrowers reflect our funding costs plus a spread to cover our operating expenses, a provision for loan losses and earnings sufficient to achieve interest coverage to meet our financial objectives. Our goal is to earn an annual minimum adjusted TIER of 1.10 and to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1.

We are subject to period-to-period volatility in our reported GAAP results due to changes in market conditions and differences in the way our financial assets and liabilities are accounted for under GAAP. Our financial assets and liabilities expose us to interest-rate risk. We use derivatives, primarily interest rate swaps, as part of our strategy in managing this risk. Our derivatives are intended to economically hedge and manage the interest-rate sensitivity mismatch between our financial assets and liabilities. We are required under GAAP to carry derivatives at fair value on our consolidated balance sheet; however, the financial assets and liabilities for which we use derivatives to economically hedge are carried at amortized cost. Changes in interest rates and the shape of the swap curve result in periodic fluctuations in the fair value of our derivatives, which may cause volatility in our earnings because we do not apply hedge accounting for our interest rate swaps. As a result, the mark-to-market changes in our interest rate swaps are recorded in earnings. Because our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, we generally record derivative losses when interest rates decline and derivative gains when interest rates rise. This earnings volatility generally is not indicative of the underlying economics of our business, as the derivative forward fair value gains or losses recorded each period may or may not be realized over time, depending on the terms of our derivative instruments and future changes in market conditions that impact the periodic cash settlement amounts of our interest rate swaps. As such, management uses our adjusted non-GAAP results to evaluate our operating performance. Our adjusted results include realized net periodic interest rate swap settlement amounts but exclude the impact of unrealized forward fair value gains and losses. Our financial debt covenants are also based on our non-GAAP adjusted results, as the forward fair value gains and losses related to our interest rate swaps do not affect our cash flows, liquidity or ability to service our debt.
 
Financial Performance

Reported Results

We reported net income of $242 million and a TIER of 2.16 for the quarter ended November 30, 2019 (“current quarter”), compared with net income of $120 million and a TIER of 1.59 for the same prior-year quarter. We reported a net loss of $82 million for the six months ended November 30, 2019, which resulted in a TIER of 0.80. In comparison, we reported net income of $168 million and a TIER of 1.40 for the same prior-year period. The significant variance between our reported results for the current year periods and the same prior-year periods was primarily attributable to mark-to-market changes in the fair value of our derivative instruments resulting from interest rate changes. Our debt-to-equity ratio increased to 22.81 as of November 30, 2019, from 19.80 as of May 31, 2019, due to the combined impact of an increase in debt to fund growth in our loan portfolio, an increase in the fair value of derivative liabilities and a decrease in equity resulting from our reported net loss of $82 million for the six months ended November 30, 2019 and patronage capital retirement of $63 million in September 2019.

The variance of $122 million between our reported net income of $242 million for the current quarter and our reported net income of $120 million for the same prior-year quarter was driven by an increase in derivative gains of $120 million. We recorded derivative gains of $183 million for the current quarter, compared with derivative gains of $63 million for the same prior-year quarter. The derivative gains in both periods were primarily attributable to an increase in the fair value of our pay-fixed swaps due to increases in medium- and long-term swap rates during each period. The rise in medium- and long-term interest rates, however, was more pronounced during the current quarter relative to the same prior-year quarter, resulting in significantly higher derivative gains. Net interest income, which accounted for 95% and 96% of total revenue for both the current quarter and same prior-year quarter, increased by $2 million, or 3%, to $79 million. The increase was attributable to an increase in our average interest-earning assets of $1,121 million, or 4%, which was partially offset by a decrease in the net interest yield of 2 basis points, or 2%, to 1.17%.



5



The variance of $250 million between our reported net loss of $82 million for the six months ended November 30, 2019, and our reported net income of $168 million for the same prior-year period was driven by an unfavorable shift in derivative fair value changes of $283 million. We recorded derivative losses of $212 million for the six months ended November 30, 2019, largely due to a decrease in the fair value of our pay-fixed swaps resulting from a decline in interest rates across the swap curve. In comparison, we recorded derivative gains of $71 million during the comparable prior-year period due to an increase in the fair value of our pay-fixed swaps resulting from a rise in interest rates across the swap yield curve. Net interest income, which accounted for 91% and 95% of total revenue for the six months ended November 30, 2019 and 2018, respectively, increased $11 million, or 7%, to $156 million. The increase was attributable to the combined impact of an increase in average interest-earning assets of $976 million, or 4%, and an increase in the net interest yield of 4 basis points, or 4%, to 1.16%. The increase in the net interest yield was due to a reduction in our average cost of funds of 5 basis points to 3.32%, which was partially offset by a slight decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. The decrease in our average cost of funds reflects the impact of the interest savings from the repayment of the 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, which more than offset an increase in the average cost of our short-term and variable-rate funding due to a rise in short-term interest rates during fiscal year 2019.

Other factors affecting the variance between our results for the six months ended November 30, 2019 and the comparable prior-year period include an increase in fee income of $7 million due to higher prepayment fees, a gain of $8 million recorded in connection with the July 22, 2019 sale of land and the absence of the loss of $7 million on the early redemption of $300 million of 10.375% collateral trust bonds recorded in the same prior-year period.

Adjusted Non-GAAP Results

Our adjusted net income totaled $44 million and adjusted TIER was 1.20 for the current quarter, compared with adjusted net income of $45 million and adjusted TIER of 1.21 for the same prior-year quarter. Adjusted net income totaled $105 million and adjusted TIER was 1.23 for the six months ended November 30, 2019, compared with adjusted net income of $73 million and adjusted TIER of 1.17 for the same prior-year period. Our adjusted debt-to-equity ratio increased to 5.78 as of November 30, 2019, from 5.73 as of May 31, 2019, primarily attributable to an increase in debt to fund loan growth.

Adjusted net income for the current quarter was relatively unchanged from the same prior-year quarter, as a modest increase in operating expenses and losses on early extinguishment of debt and a reduction in the benefit for loan losses were largely offset by lower unrealized losses on equity securities. Adjusted net interest income of $44 million also remained relatively flat compared with the same prior-year quarter, as a decrease in our adjusted net interest yield of 5 basis points, or 5%, to 0.96% was offset by the increase in average interest-earning assets of $1,121 million, or 4%. The decrease in our adjusted net interest yield of 5 basis points was driven by a decline in the average yield on interest-earning assets of 8 basis points to 4.26%, which was partially offset by a reduction in our adjusted average cost of funds of 3 basis points to 3.50%.

The increase in adjusted net income of $32 million for the six months ended November 30, 2019 from the same prior-year period was attributable to an increase in adjusted net interest income of $10 million, or 8%, to $105 million, the increase in fee income of $7 million due to higher prepayment fees, the gain of $8 million recorded in connection with the sale of land in July 2019 and the absence of the loss of $7 million on the early redemption of collateral trust bonds recorded in the same prior-year period. The increase in our adjusted net interest income of 8% was driven by the increase in our average interest-earning assets of 4% and an increase in our adjusted net interest yield of 4 basis points, or 4%, to 0.97%. Our adjusted net interest yield reflected the favorable impact of a reduction in our adjusted average cost of funds of 5 basis points to 3.52%, which was partially offset by a slight decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. The reduction in our adjusted average cost of funds was also largely attributable to the interest savings from the repayment of the 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding, which more than offset an increase in the average cost of our short-term and variable-rate funding.

See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.


6



Lending Activity

Loans to members totaled $26,438 million as of November 30, 2019, an increase of $521 million, or 2%, from May 31, 2019. The increase in loans was driven by a net increase in long-term loans of $631 million, which was partially offset by a net decrease in revolving line-of-credit loans of $110 million. CFC distribution loans, CFC power supply loans and RTFC loans increased by $527 million, $23 million and $11 million, respectively, while NCSC loans decreased by $41 million.

Long-term loan advances totaled $1,387 million during the six months ended November 30, 2019, with approximately 69% of those advances for capital expenditures by members and 25% for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $814 million during the same prior-year period, with approximately 83% of those advances for capital expenditures and 14% for the refinancing of loans made by other lenders. CFC had long-term fixed-rate loans totaling $234 million that were scheduled to reprice during the six months ended November 30, 2019. Of this total, $224 million repriced to a new long-term fixed rate, $7 million repriced to a long-term variable rate and $3 million was repaid in full. In comparison, CFC had long-term fixed-rate loans totaling $439 million that were scheduled to reprice during the same prior-year period, of which $296 million repriced to a new long-term fixed rate, $88 million repriced to a long-term variable rate and $55 million was repaid in full.

Credit Quality

The overall credit quality of our loan portfolio remained high as of November 30, 2019, as evidenced by our continued strong credit performance metrics. We had no delinquent or nonperforming loans as of November 30, 2019, and we have not experienced any loan defaults or charge-offs since fiscal year 2017. Outstanding loans to electric utility organizations represented approximately 99% of total outstanding loan portfolio as of November 30, 2019, unchanged from May 31, 2019. We historically have had limited defaults and losses on loans in our electric utility loan portfolio. We generally lend to members on a senior secured basis, which reduces the risk of loss in the event of a borrower default. Of our total loans outstanding, 93% were secured and 7% were unsecured as of November 30, 2019, compared to 92% secured and 8% unsecured as of May 31, 2019. The allowance for loan losses was $17 million as of November 30, 2019, compared with $18 million as of May 31, 2019, and the allowance coverage ratio was 0.06% as of November 30, 2019, and 0.07% as of May 31, 2019

Financing Activity

We issue debt primarily to fund growth in our loan portfolio. As such, our outstanding debt volume generally increases and decreases in response to member loan demand. Total debt outstanding increased by $403 million, or 2%, to $25,565 million as of November 30, 2019, from May 31, 2019, due to an increase in borrowings to fund the increase in loans to members. The increase was primarily attributable to a net increase in member commercial paper, select notes and daily liquidity fund notes totaling $916 million, a net increase in dealer commercial paper outstanding of $94 million and a net increase in Federal Agricultural Mortgage Corporation (“Farmer Mac”) notes payable of $40 million. These increases were partially offset by a net decrease in medium-term notes of $296 million, a net decrease in collateral trust bonds of $297 million and a net decrease in borrowings under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) of $47 million. Outstanding dealer commercial paper totaled $1,039 million as of November 30, 2019, below our targeted maximum threshold of $1,250 million.

On September 25, 2019, we received a commitment letter for the guarantee by RUS of a $500 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program.

On November 14, 2019, we provided notice to Farmer Mac of termination of the $300 million revolving note purchase agreement, effective December 20, 2019. On November 27, 2019, we received an advance of $150 million under this revolving note purchase agreement with Farmer Mac, which was repaid on December 4, 2019.

On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments totaling $125 million under the three-year agreement and $125 million under the five-year agreement. The total commitment

7



amount under the amended three-year and five-year bank revolving line of credit agreements is $1,315 million and $1,410 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,725 million.

Outlook for the Next 12 Months

We currently expect that our net interest income, adjusted net interest income, net interest yield and adjusted net interest yield will increase slightly over the next 12 months, largely due to a projected decrease in our average cost of funds and an increase in average interest-earning assets.

The face value of long-term debt scheduled to mature over the next 12 months totaled $1,772 million as of November 30, 2019, consisting of $1,624 million of fixed-rate debt with a weighted average cost of 2.45% and $148 million of variable-rate debt. We believe we have sufficient liquidity from the combination of existing cash and cash equivalents, member loan repayments, committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in private placements, to meet the demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months. As of November 30, 2019, sources of liquidity readily available for access totaled $6,591 million, consisting of (i) $114 million in cash and cash equivalents; (ii) up to $1,350 million available under committed loan facilities under the Guaranteed Underwriter Program; (iii) up to $2,722 million available for access under committed bank revolving line of credit agreements; (iv) up to $2,255 million available under a revolving note purchase agreement with Farmer Mac, subject to market conditions; and (v) up to $150 million available under a committed revolving note purchase agreement with Farmer Mac.

We believe we can continue to roll over outstanding member short-term debt of $3,600 million as of November 30, 2019, based on our expectation that our members will continue to reinvest their excess cash in our commercial paper, daily liquidity fund notes, select notes and medium-term notes. We expect to continue accessing the dealer commercial paper market as a cost-effective means of satisfying our short-term liquidity needs. Although the intra-period amount of outstanding dealer commercial paper may fluctuate based on our liquidity requirements, we intend to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount near or below $1,250 million for the foreseeable future. We expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements, which will allow us to mitigate roll-over risk, as we can draw on these facilities to repay dealer or member commercial paper that cannot be refinanced with similar debt.

While we are not subject to bank regulatory capital rules, we generally aim to maintain an adjusted debt-to-equity ratio at approximately or below 6.00-to-1. Our adjusted debt-to-equity ratio was 5.78 as of November 30, 2019, below our targeted threshold. Based on our projection of loan advances and adjusted equity over the next 12 months, we anticipate that our adjusted debt-to-equity ratio will remain below our target threshold of 6.00-to-1.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates and assumptions that affect the amount of assets, liabilities, income and expenses in the consolidated financial statements. Understanding our accounting policies and the extent to which we use management’s judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a discussion of our significant accounting policies under “Note 1—Summary of Significant Accounting Policies” in our 2019 Form 10-K.

We have identified certain accounting policies as critical because they involve significant judgments and assumptions about highly complex and inherently uncertain matters, and the use of reasonably different estimates and assumptions could have a material impact on our results of operations or financial condition. Our most critical accounting policies and estimates involve the determination of the allowance for loan losses and fair value. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as necessary based on changing conditions. Management has discussed significant judgments and assumptions in applying our critical accounting policies with the Audit Committee of our board of directors. We provide additional information on our critical accounting policies and estimates under “MD&A—Critical Accounting Policies and Estimates” in our 2019 Form 10-K. See “Item 1A. Risk

8



Factors” in our 2019 Form 10-K for a discussion of the risks associated with management’s judgments and estimates in applying our accounting policies and methods.
RECENT ACCOUNTING CHANGES AND OTHER DEVELOPMENTS

Recent Accounting Changes

See “Note 1—Summary of Significant Accounting Policies” for information on accounting standards adopted during the current year, as well as recently issued accounting standards not yet required to be adopted and the expected impact of the adoption of these accounting standards. To the extent we believe the adoption of new accounting standards has had or will have a material impact on our consolidated results of operations, financial condition or liquidity, we also discuss the impact in the applicable section(s) of this MD&A.
CONSOLIDATED RESULTS OF OPERATIONS

The section below provides a comparative discussion of our condensed consolidated results of operations between the three months ended November 30, 2019 and 2018 and the six months ended November 30, 2019 and 2018. Following this section, we provide a comparative analysis of our condensed consolidated balance sheets as of November 30, 2019 and May 31, 2019. You should read these sections together with our “Executive Summary—Outlook for the Next 12 Months” where we discuss trends and other factors that we expect will affect our future results of operations.

Net Interest Income

Net interest income represents the difference between the interest income earned on our interest-earning assets, which includes loans and investment securities, and the interest expense on our interest-bearing liabilities. Our net interest yield represents the difference between the yield on our interest-earning assets and the cost of our interest-bearing liabilities plus the impact from non-interest bearing funding. We expect net interest income and our net interest yield to fluctuate based on changes in interest rates and changes in the amount and composition of our interest-earning assets and interest-bearing liabilities. We do not fund each individual loan with specific debt. Rather, we attempt to minimize costs and maximize efficiency by proportionately funding large aggregated amounts of loans.

Table 2 presents average balances for the three and six months ended November 30, 2019 and 2018, and for each major category of our interest-earning assets and interest-bearing liabilities, the interest income earned or interest expense incurred, and the average yield or cost. Table 2 also presents non-GAAP adjusted interest expense, adjusted net interest income and adjusted net interest yield, which reflect the inclusion of net accrued periodic derivative cash settlements expense in interest expense. We provide reconciliations of our non-GAAP adjusted measures to the most comparable GAAP measures under “Non-GAAP Financial Measures.”

9



Table 2: Average Balances, Interest Income/Interest Expense and Average Yield/Cost
 
 
Three Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
Assets:
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
Long-term fixed-rate loans(1)
 
$
23,837,295

 
$
260,714

 
4.40
%
 
$
22,688,250

 
$
253,340

 
4.48
%
Long-term variable-rate loans
 
929,958

 
8,131

 
3.52

 
1,096,965

 
10,066

 
3.68

Line of credit loans
 
1,528,905

 
12,678

 
3.34

 
1,351,917

 
11,752

 
3.49

TDR loans(2)
 
11,179

 
212

 
7.63

 
12,184

 
211

 
6.95

Other income, net(3)
 

 
(287
)
 

 

 
(251
)
 

Total loans
 
26,307,337

 
281,448

 
4.30

 
25,149,316

 
275,118

 
4.39

Cash, time deposits and investment securities
 
795,676

 
5,589

 
2.83

 
833,165

 
6,135

 
2.95

Total interest-earning assets
 
$
27,103,013

 
$
287,037

 
4.26
%
 
$
25,982,481

 
$
281,253

 
4.34
%
Other assets, less allowance for loan losses
 
552,945

 
 
 
 
 
1,090,619

 
 
 
 
Total assets
 
$
27,655,958

 
 
 
 
 
$
27,073,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
4,108,239

 
$
22,112

 
2.16
%
 
$
3,816,429

 
$
22,619

 
2.38
%
Medium-term notes
 
3,485,891

 
31,440

 
3.63

 
3,910,610

 
33,816

 
3.47

Collateral trust bonds
 
7,232,411

 
64,523

 
3.59

 
7,265,598

 
68,934

 
3.81

Guaranteed Underwriter Program notes payable
 
5,375,091

 
39,786

 
2.98

 
4,835,203

 
35,014

 
2.90

Farmer Mac notes payable
 
2,962,126

 
22,654

 
3.08

 
2,556,991

 
19,697

 
3.09

Other notes payable
 
21,519

 
230

 
4.30

 
29,923

 
322

 
4.32

Subordinated deferrable debt
 
985,996


12,884

 
5.26

 
742,456


9,417

 
5.09

Subordinated certificates
 
1,355,773

 
14,242

 
4.22

 
1,377,089

 
14,347

 
4.18

Total interest-bearing liabilities
 
$
25,527,046

 
$
207,871

 
3.28
%
 
$
24,534,299

 
$
204,166

 
3.34
%
Other liabilities
 
1,116,838

 
 
 
 
 
976,113

 
 
 
 
Total liabilities
 
26,643,884

 
 
 
 
 
25,510,412

 
 
 
 
Total equity
 
1,012,074

 
 
 
 
 
1,562,688

 
 
 
 
Total liabilities and equity
 
$
27,655,958

 
 
 
 
 
$
27,073,100

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread(4)
 
 
 
 
 
0.98
%
 
 
 
 
 
1.00
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.19

 
 
 
 
 
0.19

Net interest income/net interest yield(6)
 
 
 
$
79,166

 
1.17
%
 
 
 
$
77,087

 
1.19
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income/adjusted net interest yield:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
 
$
287,037

 
4.26
%
 
 
 
$
281,253

 
4.34
%
Interest expense
 
 
 
207,871

 
3.28

 
 
 
204,166

 
3.34

Add: Net accrued periodic derivative cash settlement(7)
 
 
 
14,150

 
0.54

 
 
 
11,805

 
0.43

Adjusted interest expense/adjusted average cost(8)
 
 
 
$
222,021

 
3.50
%
 
 
 
$
215,971

 
3.53
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest spread(4)
 
 
 
 
 
0.76
%
 
 
 
 
 
0.81
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.20

 
 
 
 
 
0.20

Adjusted net interest income/adjusted net interest yield(9)
 
 
 
$
65,016

 
0.96
%
 
 
 
$
65,282

 
1.01
%
 
 
 
 
 
 
 
 
 
 
 
 
 

10



 
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
Assets:
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
 
Average Balance
 
Interest Income/Expense
 
Average Yield/Cost
Long-term fixed-rate loans(1)
 
$
23,596,704

 
$
519,192

 
4.40
%
 
$
22,691,903

 
$
505,141

 
4.44
%
Long-term variable-rate loans
 
961,704

 
17,887

 
3.72

 
1,084,188

 
19,447

 
3.58

Line of credit loans
 
1,620,994

 
28,711

 
3.54

 
1,387,579

 
23,385

 
3.36

TDR loans(2)
 
11,484

 
418

 
7.28

 
12,369

 
429

 
6.92

Other income, net(3)
 

 
(571
)
 

 

 
(576
)
 

Total loans
 
26,190,886

 
565,637

 
4.32

 
25,176,039

 
547,826

 
4.34

Cash, time deposits and investment securities
 
782,146

 
11,415

 
2.92

 
821,222

 
11,918

 
2.89

Total interest-earning assets
 
$
26,973,032

 
$
577,052

 
4.28
%
 
$
25,997,261

 
$
559,744

 
4.29
%
Other assets, less allowance for loan losses
 
579,465

 
 
 
 
 
907,444

 
 
 
 
Total assets
 
$
27,552,497

 


 
 
 
$
26,904,705

 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 


 


 


 


 


Short-term borrowings
 
$
3,809,089

 
$
44,934

 
2.36
%
 
$
3,667,402

 
$
42,038

 
2.29
%
Medium-term notes
 
3,529,164

 
63,516

 
3.60

 
3,833,484

 
66,226

 
3.45

Collateral trust bonds
 
7,309,165

 
129,904

 
3.55

 
7,370,550

 
146,639

 
3.97

Guaranteed Underwriter Program notes payable
 
5,386,771

 
80,219

 
2.98

 
4,841,855

 
70,348

 
2.90

Farmer Mac notes payable
 
2,997,053

 
47,728

 
3.18

 
2,674,397

 
40,808

 
3.04

Other notes payable
 
22,027

 
484

 
4.39

 
29,900

 
644

 
4.30

Subordinated deferrable debt
 
986,005

 
25,766

 
5.23

 
742,439

 
18,834

 
5.06

Subordinated certificates
 
1,355,960

 
28,591

 
4.22

 
1,377,524

 
28,860

 
4.18

Total interest-bearing liabilities
 
$
25,395,234

 
$
421,142

 
3.32
%
 
$
24,537,551

 
$
414,397

 
3.37
%
Other liabilities
 
1,064,284

 
 
 

 
836,273

 

 
 
Total liabilities
 
26,459,518

 
 
 

 
25,373,824

 

 
 
Total equity
 
1,092,979

 
 
 
 
 
1,530,881

 

 
 
Total liabilities and equity
 
$
27,552,497

 


 
 
 
$
26,904,705

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest spread(4)
 
 
 


 
0.96
%
 


 


 
0.92
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.20

 
 
 
 
 
0.20

Net interest income/net interest yield(6)
 
 
 
$
155,910

 
1.16
%
 
 
 
$
145,347

 
1.12
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income/adjusted net interest yield:
 
 
 
 
 


 
 
 
 
 
 
Interest income
 
 
 
$
577,052

 
4.28
%
 
 
 
$
559,744

 
4.29
%
Interest expense
 
 
 
421,142

 
3.32

 
 
 
414,397

 
3.37

Add: Net accrued periodic derivative cash settlement(7)
 
 
 
25,193

 
0.47

 
 
 
24,634

 
0.45

Adjusted interest expense/adjusted average cost(8)
 
 
 
$
446,335

 
3.52
%
 


 
$
439,031

 
3.57
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest spread(4)
 
 
 
 
 
0.76
%
 

 
 
 
0.72
%
Impact of non-interest bearing funding(5)
 
 
 
 
 
0.21

 
 
 
 
 
0.21

Adjusted net interest income/adjusted net interest yield(9)
 
 
 
$
130,717

 
0.97
%
 

 
$
120,713


0.93
%
____________________________ 
(1)Interest income on long-term, fixed-rate loans includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)Troubled debt restructuring (“TDR”) loans.
(3)Consists of late payment fees and net amortization of deferred loan fees and loan origination costs.

11



(4)Net interest spread represents the difference between the average yield on total average interest-earning assets and the average cost of total average interest-bearing liabilities. Adjusted net interest spread represents the difference between the average yield on total average interest-earning assets and the adjusted average cost of total average interest-bearing liabilities.
(5)Includes other liabilities and equity.
(6)Net interest yield is calculated based on annualized net interest income for the period divided by total average interest-earning assets for the period.
(7)Represents the impact of net accrued periodic interest rate swap settlements during the period. This amount is added to interest expense to derive non-GAAP adjusted interest expense. The average (benefit)/cost associated with derivatives is calculated based on annualized net accrued periodic interest rate swap settlements during the period divided by the average outstanding notional amount of derivatives during the period. The average outstanding notional amount of interest rate swaps was $10,599 million and $11,123 million for the three months ended November 30, 2019 and 2018, respectively. The average outstanding notional amount of interest rate swaps was $10,676 million and $11,039 million for the six months ended November 30, 2019 and 2018, respectively.
(8)Adjusted interest expense consists of interest expense plus net accrued periodic interest rate swap cash settlements expense during the period. Net accrued periodic derivative cash settlements are reported on our condensed consolidated statements of operations as a component of derivative gains (losses). Adjusted average cost is calculated based on annualized adjusted interest expense for the period divided by total average interest-bearing liabilities during the period.
(9)Adjusted net interest yield is calculated based on annualized adjusted net interest income for the period divided by total average interest-earning assets for the period.

Table 3 displays the change in net interest income between periods and the extent to which the variance is attributable to:
(i) changes in the volume of our interest-earning assets and interest-bearing liabilities or (ii) changes in the interest rates of these assets and liabilities. The table also presents the change in adjusted net interest income between periods. Changes that are not solely due to either volume or rate are allocated to these categories on a pro-rata basis based on the absolute value of the change due to average volume and average rate.
 

12



Table 3: Rate/Volume Analysis of Changes in Interest Income/Interest Expense
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
 
 
2019 versus 2018
 
2019 versus 2018
 
 
Total
 
Variance due to:(1)
 
Total
 
Variance due to:(1)
(Dollars in thousands)
 
Variance
 
Volume
 
Rate
 
Variance
 
Volume
 
Rate
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Long-term fixed-rate loans
 
$
7,374

 
$
12,103

 
$
(4,729
)
 
$
14,051

 
$
18,706

 
$
(4,655
)
Long-term variable-rate loans
 
(1,935
)
 
(1,556
)
 
(379
)
 
(1,560
)
 
(2,244
)
 
684

Line of credit loans
 
926

 
1,502

 
(576
)
 
5,326

 
3,859

 
1,467

Restructured loans
 
1

 
(18
)
 
19

 
(11
)
 
(32
)
 
21

Other income, net
 
(36
)
 

 
(36
)
 
5

 

 
5

Total loans
 
6,330

 
12,031

 
(5,701
)
 
17,811

 
20,289

 
(2,478
)
Cash, time deposits and investment securities
 
(546
)
 
(292
)
 
(254
)
 
(503
)
 
(598
)
 
95

Interest income
 
5,784

 
11,739

 
(5,955
)
 
17,308

 
19,691

 
(2,383
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
(507
)
 
1,663

 
(2,170
)
 
2,896

 
1,505

 
1,391

Medium-term notes
 
(2,376
)
 
(3,755
)
 
1,379

 
(2,710
)
 
(5,424
)
 
2,714

Collateral trust bonds
 
(4,411
)
 
(502
)
 
(3,909
)
 
(16,735
)
 
(1,619
)
 
(15,116
)
Guaranteed Underwriter Program notes payable
 
4,772

 
3,803

 
969

 
9,871

 
7,703

 
2,168

Farmer Mac notes payable
 
2,957

 
3,058

 
(101
)
 
6,920

 
4,798

 
2,122

Other notes payable
 
(92
)
 
(91
)
 
(1
)
 
(160
)
 
(171
)
 
11

Subordinated deferrable debt
 
3,467

 
3,055

 
412

 
6,932

 
6,110

 
822

Subordinated certificates
 
(105
)
 
(261
)
 
156

 
(269
)
 
(529
)
 
260

Interest expense
 
3,705

 
6,970

 
(3,265
)
 
6,745

 
12,373

 
(5,628
)
Net interest income
 
$
2,079

 
$
4,769

 
$
(2,690
)
 
$
10,563

 
$
7,318

 
$
3,245

 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
$
5,784

 
$
11,739

 
$
(5,955
)
 
$
17,308

 
$
19,691

 
$
(2,383
)
Interest expense
 
3,705

 
6,970

 
(3,265
)
 
6,745

 
12,373

 
(5,628
)
Net accrued periodic derivative cash settlements expense(2)
 
2,345

 
(587
)
 
2,932

 
559

 
(874
)
 
1,433

Adjusted interest expense(3)
 
6,050

 
6,383

 
(333
)
 
7,304

 
11,499

 
(4,195
)
Adjusted net interest income
 
$
(266
)
 
$
5,356

 
$
(5,622
)
 
$
10,004

 
$
8,192

 
$
1,812

____________________________ 
(1)The changes for each category of interest income and interest expense are divided between the portion of change attributable to the variance in volume and the portion of change attributable to the variance in rate for that category. The amount attributable to the combined impact of volume and rate has been allocated to each category based on the proportionate absolute dollar amount of change for that category.
(2)For net accrued periodic derivative cash settlements, the variance due to average volume represents the change in derivative cash settlements resulting from the change in the average notional amount of derivative contracts outstanding. The variance due to average rate represents the change in derivative cash settlements resulting from the net difference between the average rate paid and the average rate received for interest rate swaps during the period.
(3) See “Non-GAAP Financial Measures” for additional information on our adjusted non-GAAP measures.

Reported Net Interest Income
Reported net interest income of $79 million for the current quarter was up $2 million, or 3%, from the comparable prior-year quarter, as the decrease in the net interest yield of 2% (2 basis points) to 1.17% was partially offset by an increase in average interest-earning assets of 4%.


13



Net Interest Yield: The decrease of 2 basis points in the net interest yield for the current quarter was due to a decrease in the average yield on interest-earning assets of 8 basis points to 4.26%, partially offset by a decrease in the average cost of funds of 6 basis points to 3.28%. The decrease in the average yield on interest-earning assets was attributable to an 8 basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since November 30, 2018. The decrease in our average cost of funds was largely due to higher interest cost savings during the current quarter from the full repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds during the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding. The replacement of this debt with lower-cost funding more than offset an increase in the average cost of our short-term and variable-rate funding.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% during the current quarter was driven by growth in average total loans of $1,158 million, or 5%, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.

Reported net interest income of $156 million for the six months ended November 30, 2019 was up $11 million, or 7%, from the comparable prior-year period, driven by an increase in the net interest yield of 4% (4 basis points) to 1.16%, coupled with an increase in average interest-earning assets of 4%.

Net Interest Yield: The increase of 4 basis points in the net interest yield was due to a decrease in the average cost of funds of 5 basis points to 3.32%, partially offset by a decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. The decrease in our average cost of funds was largely due to the interest cost savings from the repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds in the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding. These amounts more than offset the increase in the average cost of our short-term, variable-rate borrowings resulting from the rise in short-term interest rates during fiscal year 2019 and an increase in the average cost of subordinated deferrable debt resulting from the issuance of $250 million of 5.50% subordinated deferrable debt in May 2019. The decrease in the average yield on interest-earning assets was attributable to a 4 basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since November 30, 2018. The decrease in the average yield on our long-term fixed rate loan portfolio was partially offset by higher average rates on line of credit and variable-rate loans due to the overall rise in short-term interest rates during fiscal year 2019.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% during the six months ended November 30, 2019 was driven by growth in average total loans of $1,015 million, or 4%, as members obtained advances to fund capital investments and refinanced with us loans made by other lenders.

Adjusted Net Interest Income

Adjusted net interest income of $65 million for the current quarter remained relatively unchanged from the comparable prior-year quarter, as the decrease in the adjusted net interest yield of 5 basis points, or 5%, to 0.96% offset the increase in average interest-earning assets of 4%.

Adjusted Net Interest Yield: The decrease in the adjusted net interest yield was primarily due to a decrease in the average yield on interest-earning assets of 8 basis points to 4.26%, partially offset by a reduction in our adjusted average cost of funds of 3 basis points to 3.50%. As noted above, the decrease in the average yield on interest-earning assets was attributable to an 8 basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since November 30, 2018. The reduction in our adjusted average cost of funds was also largely attributable to higher interest cost savings from the full repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds during the first half of fiscal year 2019 and the replacement of this debt with lower-cost funding. The replacement of this debt with lower-cost funding more than offset an increase in the average cost of our short-term and variable-rate funding.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% was driven by the growth in average total loans of $1,158 million.


14



Adjusted net interest income of $131 million for the six months ended November 30, 2019 was up $10 million, or 8%, from the comparable prior-year period, driven by an increase in the adjusted net interest yield of 4 basis points, or 4%, to 0.97% and the increase in average interest-earning assets of 4%.

Adjusted Net Interest Yield: The increase in the adjusted net interest yield was due to a reduction in our adjusted average cost of funds of 5 basis points to 3.52%, partially offset by the decrease in the average yield on interest-earning assets of 1 basis point to 4.28%. As noted above, the reduction in our adjusted average cost of funds was largely attributable to the interest cost savings from the repayment of the $1 billion aggregate principal amount of the 10.375% collateral trust bonds and the replacement of this debt with lower-cost funding. Together these amounts more than offset the increase in the average cost of our short-term, variable-rate borrowings resulting from the rise in short-term interest rates during fiscal year 2019 and the increase in the average cost of subordinated deferrable debt resulting from the issuance of $250 million of 5.50% subordinated deferrable debt in May 2019. The decrease in the average yield on interest-earning assets was attributable to a 4 basis point decrease in the average yield on our long-term fixed rate loan portfolio, as new loan advances were made at lower rates due to a decline in medium- and long-term interest rates since November 30, 2018. The decrease in the average yield on our long-term fixed rate loan portfolio was partially offset by higher average rates on line of credit and variable-rate loans due to the overall rise in short-term interest rates during fiscal year 2019.

Average Interest-Earning Assets: The increase in average interest-earning assets of 4% was driven by the growth in average total loans of $1,015 million.

We include net accrued periodic derivative cash settlements during the period in the calculation of our adjusted average cost of funds, which, as a result, also impacts the calculation of adjusted net interest income and adjusted net interest yield. Net periodic derivative cash settlement expense totaled $14 million for the current quarter, compared with $12 million for the same prior-year quarter. Net periodic derivative cash settlement expense totaled $25 million for the six months ended November 30, 2019, relatively unchanged from the same prior-year period. See “Non-GAAP Financial Measures” for additional information on our adjusted measures, including a reconciliation of these measures to the most comparable GAAP measures.

Provision for Loan Losses

Our provision for loan losses in each period is primarily driven by the level of allowance that we determine is necessary for probable incurred loan losses inherent in our loan portfolio as of each balance sheet date. The allowance for loan losses was $17 million and $18 million as of November 30, 2019 and May 31, 2019, respectively.

We recorded a benefit for loan losses of $1 million for both the three and six months ended November 30, 2019. In comparison, we recorded a benefit for loan losses of $2 million for both the three and six months ended November 30, 2018. The credit quality and performance statistics of our loan portfolio remain strong. We had no payment defaults or charge-offs during the quarter, and no delinquent loans or nonperforming loans in our loan portfolio as of November 30, 2019 or May 31, 2019.

We provide additional information on our allowance for loan losses under “Credit Risk—Allowance for Loan Losses” and “Note 5—Allowance for Loan Losses” of this Report. For a description of our methodology for determining the allowance for loan losses, see “MD&A—Critical Accounting Policies and Estimates—Allowance for Loan Losses” and “Note 1—Summary of Significant Accounting Policies—Allowance for Loan Losses” in our 2019 Form 10-K.

Non-Interest Income

Non-interest income consists of fee and other income, gains and losses on derivatives not accounted for in hedge accounting relationships and unrealized gains and losses on equity securities.
 
Table 4 presents the components of non-interest income for the three and six months ended November 30, 2019 and 2018.






15



Table 4: Non-Interest Income
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019

2018
Non-interest income:
 
 
 
 
 
 
 
 
Fee and other income
 
$
3,842

 
$
3,595

 
$
14,783

 
$
7,506

Derivative gains (losses)
 
183,450

 
63,343

 
(212,275
)
 
70,526

Unrealized gains (losses) on equity securities
 
(114
)
 
(1,619
)
 
1,506

 
(2,345
)
Total non-interest income
 
$
187,178

 
$
65,319

 
$
(195,986
)
 
$
75,687


The significant variance in non-interest income between periods was primarily attributable to changes in the net derivative gains (losses) recognized in our condensed consolidated statements of operations. In addition, fee and other income increased by $7 million due to higher prepayment fees during the six months ended November 30, 2019.

Derivative Gains (Losses)

Our derivative instruments are an integral part of our interest rate risk management strategy. Our principal purpose in using derivatives is to manage our aggregate interest rate risk profile within prescribed risk parameters. The derivative instruments we use primarily include interest rate swaps, which we typically hold to maturity. In addition, we may on occasion use treasury locks to manage the interest rate risk associated with debt that is scheduled to reprice in the future. The primary factors affecting the fair value of our derivatives and derivative gains (losses) recorded in our results of operations include changes in interest rates, the shape of the swap curve and the composition of our derivative portfolio. We generally do not designate our interest rate swaps, which currently account for all our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our condensed consolidated statements of operations under derivative gains (losses). However, we typically designate treasury locks as cash flow hedges. We did not have any derivatives designated as accounting hedges as of November 30, 2019 or May 31, 2019.

We currently use two types of interest rate swap agreements: (i) we pay a fixed rate of interest and receive a variable rate of interest (“pay-fixed swaps”); and (ii) we pay a variable rate of interest and receive a fixed rate of interest (“receive-fixed swaps”). The interest amounts are based on a specified notional balance, which is used for calculation purposes only. The benchmark variable rate for the substantial majority of the floating rate payments under our swap agreements is 3-month London Interbank Offered Rate (“LIBOR”). As interest rates decline, pay-fixed swaps generally decrease in value and result in the recognition of derivative losses, as the amount of interest we pay remains fixed, while the amount of interest we receive declines. In contrast, as interest rates rise, pay-fixed swaps generally increase in value and result in the recognition of derivative gains, as the amount of interest we pay remains fixed, but the amount we receive increases. With a receive-fixed swap, the opposite results occur as interest rates decline or rise. Because our pay-fixed and receive-fixed swaps are referenced to different maturity terms along the swap curve, different changes in the swap curve—parallel, flattening, inversion or steepening—will also impact the fair value of our derivatives.

Table 5 presents the components of net derivative gains (losses) recorded in our results of operations. Derivative cash settlements expense represents the net periodic contractual interest amount for our interest-rate swaps for the reporting period. Derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in expected future interest rates over the remaining life of our derivative contracts.

Table 5: Derivative Gains (Losses)
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Derivative gains (losses) attributable to:
 
 
 
 
 
 
 
 
Derivative cash settlements expense
 
$
(14,150
)
 
$
(11,805
)
 
$
(25,193
)
 
$
(24,634
)
Derivative forward value gains (losses)
 
197,600

 
75,148

 
(187,082
)
 
95,160

Derivative gains (losses)
 
$
183,450

 
$
63,343

 
$
(212,275
)
 
$
70,526



16



The net derivative gains of $183 million for the three months ended November 30, 2019 were attributable to a net increase in the fair value of our pay-fixed swaps resulting from an increase in medium- and long-term interest rates during the current quarter. The net derivative losses of $212 million for the six months ended November 30, 2019, were attributable to a net decrease in the fair value of our pay-fixed swaps resulting from a decline in interest rates across the swap curve, with short-term interest rates experiencing a greater decline than medium- and long-term rates. The swap curve remained inverted, as short-term interest rates continued to exceed medium- and long-term interest rates as of the end of the current quarter, as depicted by the November 30, 2019, August 31, 2019 and May 31, 2019 swap curves presented in the comparative swap curves chart below.

The net derivative gains of $63 million and $71 million in the three and six months ended November 30, 2018, respectively, were attributable to an increase in the fair value of our pay-fixed swaps resulting from an increase in interest rates across the swap yield curve, as depicted by the November 30, 2018 and May 31, 2018 swap curves presented in the comparative swap curves chart below.

Our derivative portfolio consists of a higher proportion of pay-fixed swaps than receive-fixed swaps, with pay-fixed swaps representing approximately 70% and 68% of the outstanding notional amount of our derivative portfolio as of November 30, 2019 and May 31, 2019, respectively. The profile of our interest rate swap portfolio, however, may change as a result of changes in market conditions and actions taken to manage exposure to interest rate risk. The average remaining maturity of our pay-fixed and receive-fixed swaps was 18 years and four years, respectively, as of November 30, 2019. In comparison, the average remaining maturity of our pay-fixed and receive-fixed swaps was 19 years and four years, respectively, as of November 30, 2018.

Derivative Cash Settlements

As indicated in Table 5 above, net periodic derivative cash settlement expense totaled $14 million and $25 million for the three and six months ended November 30, 2019, respectively. In comparison, net periodic derivative cash settlement expense totaled $12 million and $25 million for the three and six months ended November 30, 2018, respectively. Table 6 displays, by swap agreement type, the average notional amount outstanding and the weighted-average interest rate paid and received for derivative cash settlements during each respective period.

Table 6: Derivative Cash Settlements Expense—Average Notional Amounts and Interest Rates
 
 
Three Months Ended November 30,
 
 
2019
 
2018
(Dollars in thousands)
 
Average
Notional
Balance
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
 
Average
Notional
Balance
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
Pay-fixed swaps
 
$
7,299,322

 
2.84
%
 
2.08
%
 
$
7,424,114

 
2.82
%
 
2.43
%
Receive-fixed swaps
 
3,300,099

 
2.77

 
2.59

 
3,699,000

 
3.05

 
2.52

Total
 
$
10,599,421

 
2.82
%
 
2.24
%
 
$
11,123,114

 
2.90
%
 
2.46
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended November 30,
 
 
2019
 
2018
(Dollars in thousands)
 
Average
Notional
Balance
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
 
Average
Notional
Balance
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
Pay-fixed swaps
 
$
7,326,509

 
2.84
%
 
2.24
%
 
$
7,308,859

 
2.82
%
 
2.38
%
Receive-fixed swaps
 
3,349,820

 
2.93

 
2.57

 
3,729,738

 
3.01

 
2.52

Total
 
$
10,676,329

 
2.87
%
 
2.34
%
 
$
11,038,597

 
2.88
%
 
2.43
%

Comparative Swap Curves

The chart below provides comparative swap curves as of the end of November 30, 2019, August 31, 2019, May 31, 2019, November 30, 2018 and May 31, 2018.

17





chart-21d27e57f28a5659bb6.jpg
____________________________ 
Benchmark rates obtained from Bloomberg.

See “Note 9—Derivative Instruments and Hedging Activities” for additional information on our derivative instruments.

Non-Interest Expense

Non-interest expense consists of salaries and employee benefit expense, general and administrative expenses, gains and losses on the early extinguishment of debt and other miscellaneous expenses.

Table 7 presents the components of non-interest expense recorded in results of operations for the three and six months ended November 30, 2019 and 2018.

18



Table 7: Non-Interest Expense
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Non-interest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
$
(12,728
)
 
$
(12,392
)
 
$
(25,670
)
 
$
(25,074
)
Other general and administrative expenses
 
(12,041
)
 
(11,478
)
 
(24,428
)
 
(22,001
)
Losses on early extinguishment of debt
 
(614
)
 

 
(614
)
 
(7,100
)
Other non-interest (expense) income
 
(315
)
 
(355
)
 
6,864

 
(749
)
Total non-interest expense
 
$
(25,698
)
 
$
(24,225
)
 
$
(43,848
)
 
$
(54,924
)

Non-interest expense of $26 million for the current quarter increased by $1 million, or 6%, from the comparable prior-year quarter, primarily due to increases in general and administrative expenses and other non-interest expense.

Non-interest expense of $44 million for the six months ended November 30, 2019 decreased by $11 million, or 20%, from the same prior-year period. The decrease was largely due to the gain of $8 million recorded in connection with the July 22, 2019 sale of land and lower losses on early extinguishment of debt.

Net Income (Loss) Attributable to Noncontrolling Interests

Net income (loss) attributable to noncontrolling interests represents 100% of the results of operations of NCSC and RTFC, as the members of NCSC and RTFC own or control 100% of the interest in their respective companies. The fluctuations in net income (loss) attributable to noncontrolling interests are primarily due to changes in the fair value of NCSC’s derivative instruments recognized in NCSC’s earnings.

We recorded net income attributable to noncontrolling interests of less than $1 million for the three months ended November 30, 2019 and a net loss of $2 million for the six months ended November 30, 2019. In comparison, we recorded net income attributable to noncontrolling interests of less than $1 million for both the three and six months ended November 30, 2018.
CONSOLIDATED BALANCE SHEET ANALYSIS

Total assets of $27,567 million as of November 30, 2019 increased by $442 million, or 2%, from May 31, 2019, primarily due to growth in our loan portfolio. Total liabilities of $26,409 million as of November 30, 2019 increased by $588 million, or 2%, from May 31, 2019, primarily due to debt issuances to fund loan growth and an increase in our derivative liabilities, attributable to a decrease in the fair value of our pay-fixed swaps. Total equity decreased by $146 million to $1,158 million as of November 30, 2019, attributable to our reported net loss of $82 million during the six months ended November 30, 2019 and the patronage capital retirement of $63 million in September 2019.

Following is a discussion of changes in the major components of our assets and liabilities during the six months ended November 30, 2019. Period-end balance sheet amounts may vary from average balance sheet amounts due to liquidity and balance sheet management activities that are intended to manage liquidity requirements for the company and our market risk exposure in accordance with our risk appetite.

Loan Portfolio

We offer long-term loans that provide borrowers the option to select fixed- and variable-rate loan advances and line of credit loans. The substantial majority of loans in our portfolio represent fixed-rate advances under secured long-term facilities with terms up to 35 years. Line of credit loans are typically variable-rate revolving facilities and are generally unsecured.




19



Loans Outstanding

Table 8 summarizes loans to members, by loan type and by member class, as of November 30, 2019 and May 31, 2019. As indicated in Table 8, long-term fixed-rate loans accounted for 90% and 89% of loans to members as of November 30, 2019 and May 31, 2019, respectively.

Table 8: Loans Outstanding by Type and Member Class
 
 
November 30, 2019
 
May 31, 2019
 

(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Change
Loans by type:
 
 
 
 
 
 
 
 
 
 
Long-term loans:
 
 
 
 
 
 
 
 
 
 
Fixed-rate
 
$
23,861,584

 
90
%
 
$
23,094,253

 
89
%
 
$
767,331

Variable-rate
 
930,949

 
4

 
1,066,880

 
4

 
(135,931
)
Total long-term loans
 
24,792,533

 
94

 
24,161,133

 
93

 
631,400

Lines of credit
 
1,634,346

 
6

 
1,744,531

 
7

 
(110,185
)
Total loans outstanding
 
26,426,879

 
100

 
25,905,664

 
100

 
521,215

Deferred loan origination costs

11,302




11,240




62

Loans to members

$
26,438,181


100
%

$
25,916,904


100
%

$
521,277

 
 
 
 
 
 
 
 
 
 
 
Loans by member class:
 
 
 
 
 
 
 
 
 
 
CFC:
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
20,682,596

 
78
%
 
$
20,155,266

 
78
%
 
$
527,330

Power supply
 
4,601,783

 
18

 
4,578,841

 
18

 
22,942

Statewide and associate
 
83,897

 

 
83,569

 

 
328

CFC total
 
25,368,276

 
96

 
24,817,676

 
96

 
550,600

NCSC
 
702,279

 
3

 
742,888

 
3

 
(40,609
)
RTFC
 
356,324

 
1

 
345,100

 
1

 
11,224

Total loans outstanding
 
26,426,879

 
100

 
25,905,664

 
100

 
521,215

Deferred loan origination costs
 
11,302

 

 
11,240

 

 
62

Loans to members
 
$
26,438,181

 
100
%
 
$
25,916,904

 
100
%
 
$
521,277


Loans to members totaled $26,438 million as of November 30, 2019, an increase of $521 million, or 2%, from May 31, 2019. The increase in loans was driven by a net increase in long-term loans of $631 million, which was partially offset by a net decrease in revolving line-of-credit loans of $110 million. CFC distribution loans, CFC power supply loans and RTFC loans increased by $527 million, $23 million and $11 million, respectively, while NCSC loans decreased by $41 million.

Long-term loan advances totaled $1,387 million during the six months ended November 30, 2019, with approximately 69% of those advances for capital expenditures by members and 25% for the refinancing of loans made by other lenders. In comparison, long-term loan advances totaled $814 million during the same prior-year period, with approximately 83% of those advances for capital expenditures by members and 14% for refinancing of loans made by other lenders.

We provide additional information on our loan product types in “Item 1. Business—Loan Programs” and “Note 4—Loans” in our 2019 Form 10-K. See “Debt—Collateral Pledged” below for information on encumbered and unencumbered loans and “Credit Risk Management” for information on the credit risk profile of our loan portfolio.

Loan Retention Rate

Table 9 presents a summary of the options selected by borrowers for CFC’s long-term fixed-rate loans that repriced, in accordance with our standard loan repricing provisions, during the six months ended November 30, 2019 and during fiscal year 2019. At the repricing date, the borrower has the option of (i) selecting CFC’s current long-term fixed rate for a term of

20



between one year and up to the final maturity of the loan; (ii) selecting CFC’s current long-term variable rate; or (iii) repaying the loan in full.

Table 9: Historical Retention Rate and Repricing Selection(1) 
 
 
Six Months Ended
 
Fiscal Year Ended
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
Loans retained:
 
 
 
 
 
 
 
 
Long-term fixed rate selected
 
$
224,423

 
96
%
 
$
568,252

 
75
%
Long-term variable rate selected
 
6,772

 
3

 
123,636

 
16

Total loans retained by CFC
 
231,195

 
99

 
691,888

 
91

Loans repaid
 
2,634

 
1

 
69,250

 
9

Total
 
$
233,829

 
100
%
 
$
761,138

 
100
%
____________________________ 
(1)Does not include NCSC and RTFC loans.

As shown in Table 9, of the loans that repriced during the six months ended November 30, 2019 and fiscal year 2019, the substantial majority of borrowers selected a new long-term fixed or variable rate. The average retention rate, which is calculated based on the election made by the borrower at the repricing date, was 96% for CFC loans that repriced during the three fiscal year period ended May 31, 2019.

Debt

We utilize both short-term borrowings and long-term debt as part of our funding strategy and asset/liability interest rate risk management. We seek to maintain diversified funding sources across products, programs and markets to manage funding concentrations and reduce our liquidity or debt rollover risk. Our funding sources include a variety of secured and unsecured debt securities in a wide range of maturities to our members and affiliates and in the capital markets.

Debt Outstanding

Table 10 displays the composition, by product type, of our outstanding debt as of November 30, 2019 and May 31, 2019. Table 10 also displays the composition of our debt based on several additional selected attributes.

21



Table 10: Total Debt Outstanding
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
 
Change
Debt product type:
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
Members, at par
 
$
1,371,902

 
$
1,111,795

 
$
260,107

Dealer, net of discounts
 
1,038,862

 
944,616

 
94,246

Total commercial paper
 
2,410,764

 
2,056,411

 
354,353

Select notes to members
 
1,470,579

 
1,023,952

 
446,627

Daily liquidity fund notes to members
 
508,169

 
298,817

 
209,352

Medium-term notes:
 
 
 
 
 


Members, at par
 
673,051

 
625,626

 
47,425

Dealer, net of discounts
 
2,598,972

 
2,942,045

 
(343,073
)
Total medium-term notes
 
3,272,023

 
3,567,671

 
(295,648
)
Collateral trust bonds
 
7,086,585

 
7,383,732

 
(297,147
)
Guaranteed Underwriter Program notes payable
 
5,363,798

 
5,410,507

 
(46,709
)
Farmer Mac notes payable
 
3,094,954

 
3,054,914

 
40,040

Other notes payable
 
16,603

 
22,515

 
(5,912
)
Subordinated deferrable debt
 
986,026

 
986,020

 
6

Members’ subordinated certificates:
 
 
 
 
 
 
Membership subordinated certificates
 
630,479

 
630,474

 
5

Loan and guarantee subordinated certificates
 
503,403

 
505,485

 
(2,082
)
Member capital securities
 
221,170

 
221,170

 

Total members’ subordinated certificates
 
1,355,052

 
1,357,129

 
(2,077
)
Total debt outstanding
 
$
25,564,553

 
$
25,161,668


$
402,885

 
 
 
 
 
 
 
Security type:
 
 
 
 
 
 
Secured debt
 
61
%
 
63
%
 
 
Unsecured debt
 
39

 
37

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Funding source:
 
 
 
 
 
 
Members
 
21
%
 
18
%
 
 
Private placement:
 
 
 
 
 
 
Guaranteed Underwriter Program notes payable
 
21

 
21

 
 
Farmer Mac notes payable
 
12

 
12

 
 
Total private placement
 
33

 
33

 
 
Capital markets
 
46

 
49

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Interest rate type:
 
 
 
 
 
 
Fixed-rate debt
 
72
%
 
77
%
 
 
Variable-rate debt
 
28

 
23

 
 
Total
 
100
%
 
100
%
 
 
Interest rate type, including the impact of swaps:
 
 
 
 
 
 
Fixed-rate debt(1)
 
89
%
 
93
%
 
 
Variable-rate debt(2)
 
11

 
7

 
 
Total
 
100
%
 
100
%
 
 
 
 
 
 
 
 
 
Maturity classification:(3)
 
 
 
 
 
 
Short-term borrowings
 
19
%
 
14
%
 
 
Long-term and subordinated debt(4)
 
81

 
86

 
 
Total
 
100
%
 
100
%
 
 


22



____________________________ 
(1) Includes variable-rate debt that has been swapped to a fixed rate, net of any fixed-rate debt that has been swapped to a variable rate.
(2) Includes fixed-rate debt that has been swapped to a variable rate, net of any variable-rate debt that has been swapped to a fixed rate. Also includes commercial paper notes, which generally have maturities of less than 90 days. The interest rate on commercial paper notes does not change once the note has been issued; however, the interest rate for new commercial paper issuances changes daily.
(3) Borrowings with an original contractual maturity of one year or less are classified as short-term borrowings. Borrowings with an original contractual maturity of greater than one year are classified as long-term debt.
(4) Consists of long-term debt, subordinated deferrable debt and total members’ subordinated debt reported on the condensed consolidated balance sheets. Maturity classification is based on the original contractual maturity as of the date of issuance of the debt.

Our outstanding debt volume generally increases and decreases in response to member loan demand. As outstanding loan balances increased during the six months ended November 30, 2019, our debt volume also increased. Total debt outstanding of $25,565 million as of November 30, 2019, increased by $403 million or 2%, from May 31, 2019, due to an increase in borrowings to fund the increase in loans to members. The increase was primarily attributable to net increases in member commercial paper, select notes and daily liquidity fund notes of $916 million, a net increase in dealer commercial paper outstanding of $94 million and a net increase in Farmer Mac notes payable of $40 million. These increases were partially offset by a net decrease in medium-term notes of $296 million, a net decrease in collateral trust bonds of $297 million and a net decrease in borrowings under the Guaranteed Underwriter Program of $47 million.

Below is a summary of significant financing activities during the six months ended November 30, 2019.
On September 25, 2019, we received a commitment letter for the guarantee by RUS of a $500 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program.
On October 15, 2019, we redeemed the $300 million outstanding principal amount of our 2.30% collateral trust bonds due November 15, 2019 at par.
On November 14, 2019, we provided notice to Farmer Mac of termination of the $300 million revolving note purchase agreement, effective December 20, 2019. On November 27, 2019, we received an advance of $150 million under this revolving note purchase agreement with Farmer Mac, which was repaid on December 4, 2019, prior to the termination of the agreement.
On November 15, 2019, we redeemed the $6 million outstanding principal amount of our 9.07% notes payable due
May 15, 2022, at a premium of approximatively $1 million.

On November 26, 2019 we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain third-party bank commitments under each agreement, which resulted in a reduction of $250 million in the total commitment amount under our committed bank revolving line of credit agreements.
On November 27, 2019, we provided notice to investors of our intent to redeem all $400 million outstanding principal amount of our 2.00% collateral trust bonds due January 27, 2020, on December 27, 2019. We redeemed these outstanding collateral trust bonds at par on December 27, 2019.

Member Investments

Debt securities issued to our members represent an important, stable source of funding. Table 11 displays outstanding member debt, by debt product type, as of November 30, 2019 and May 31, 2019.


23



Table 11: Member Investments
 
 
November 30, 2019
 
May 31, 2019
 
Change
(Dollars in thousands)
 
Amount
 
% of Total (1)
 
Amount
 
% of Total (1)
 
Commercial paper
 
$
1,371,902

 
57
%
 
$
1,111,795

 
54
%
 
$
260,107

Select notes
 
1,470,579

 
100

 
1,023,952

 
100

 
446,627

Daily liquidity fund notes
 
508,169

 
100

 
298,817

 
100

 
209,352

Medium-term notes
 
673,051

 
21

 
625,626

 
18

 
47,425

Members’ subordinated certificates
 
1,355,052

 
100

 
1,357,129

 
100

 
(2,077
)
Total outstanding member debt
 
$
5,378,753

 
 
 
$
4,417,319

 
 
 
$
961,434

 
 
 
 
 
 
 
 
 
 
 
Percentage of total debt outstanding
 
21
%
 
 
 
18
%
 
 
 
 

____________________________ 
(1) Represents outstanding debt attributable to members for each debt product type as a percentage of the total outstanding debt for each debt product type.

Member investments totaled $5,379 million and accounted for 21% of total debt outstanding as of November 30, 2019, compared with $4,417 million, or 18%, of total debt outstanding as of May 31, 2019. Over the last three fiscal years, total outstanding member investments as of the end of each quarterly reporting period has averaged $4,551 million.

Short-Term Borrowings

Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Short-term borrowings totaled $4,789 million and accounted for 19% of total debt outstanding as of November 30, 2019, compared with $3,608 million, or 14%, of total debt outstanding as of May 31, 2019. See “Liquidity Risk” below and for “Note 6—Short-Term Borrowings” for information on the composition of our short-term borrowings.

Long-Term and Subordinated Debt

Long-term debt, defined as debt with an original contractual maturity term of greater than one year, primarily consists of medium-term notes, collateral trust bonds, notes payable under the Guaranteed Underwriter Program and notes payable under our note purchase agreement with Farmer Mac. Subordinated debt consists of subordinated deferrable debt and members’ subordinated certificates. Our subordinated deferrable debt and members’ subordinated certificates have original contractual maturity terms of greater than one year.

Long-term and subordinated debt totaled $20,776 million and accounted for 81% of total debt outstanding as of November 30, 2019, compared with $21,554 million, or 86%, of total debt outstanding as of May 31, 2019. We provide additional information on our long-term debt below under “Liquidity Risk” and in “Note 7—Long-Term Debt” and “Note 8—Subordinated Deferrable Debt.”

Collateral Pledged

We are required to pledge loans or other collateral in transactions under our collateral trust bond indentures, note purchase agreements with Farmer Mac and bond agreements under the Guaranteed Underwriter Program. We are required to maintain pledged collateral equal to at least 100% of the face amount of outstanding borrowings. However, as discussed below, we typically maintain pledged collateral in excess of the required percentage. Under the provisions of our committed bank revolving line of credit agreements, the excess collateral that we are allowed to pledge cannot exceed 150% of the outstanding borrowings under our collateral trust bond indentures, Farmer Mac note purchase agreements or the Guaranteed Underwriter Program. In certain cases, provided that all conditions of eligibility under the different programs are satisfied, we may withdraw excess pledged collateral or transfer collateral from one borrowing program to another to facilitate a new debt issuance.

Table 12 displays the collateral coverage ratios as of November 30, 2019 and May 31, 2019 for the debt agreements noted above that require us to pledge collateral.

24



Table 12: Collateral Pledged
 
 
Requirement/Limit
 
 
 
 
Debt Indenture
Minimum
 
Committed Bank Revolving Line of Credit Agreements
Maximum
 
Actual(1)
Debt Agreement
 
 
 
November 30, 2019
 
May 31, 2019
Collateral trust bonds 1994 indenture
 
100
%
 
150
%
 
131
%
 
118
%
Collateral trust bonds 2007 indenture
 
100

 
150

 
117

 
117

Guaranteed Underwriter Program notes payable
 
100

 
150

 
114

 
114

Farmer Mac notes payable
 
100

 
150

 
121

 
123

Clean Renewable Energy Bonds Series 2009A
 
100

 
150

 
106

 
112

____________________________ 
(1) Calculated based on the amount of collateral pledged divided by the face amount of outstanding secured debt.

Of our total debt outstanding of $25,565 million as of November 30, 2019, $15,554 million, or 61%, was secured by pledged loans totaling $18,450 million. In comparison, of our total debt outstanding of $25,162 million as of May 31, 2019, $15,858 million, or 63%, was secured by pledged loans totaling $18,877 million. Total debt outstanding on our condensed consolidated balance sheet is presented net of unamortized discounts and issuance costs. However, our collateral pledging requirements are based on the face amount of secured outstanding debt, which does not take into consideration the impact of net unamortized discounts and issuance costs.

Table 13 displays the unpaid principal balance of loans pledged for secured debt, the excess collateral pledged and unencumbered loans as of November 30, 2019 and May 31, 2019.

Table 13: Unencumbered Loans
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Total loans outstanding(1) 
 
$
26,426,879

 
$
25,905,664

Less: Loans required to be pledged for secured debt (2)
 
(15,825,688
)
 
(16,137,357
)
 Loans pledged in excess of requirement (2)(3)
 
(2,623,949
)
 
(2,739,248
)
 Total pledged loans
 
(18,449,637
)
 
(18,876,605
)
Unencumbered loans
 
$
7,977,242

 
$
7,029,059

Unencumbered loans as a percentage of total loans
 
30
%
 
27
%
____________________________ 
(1) Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of $11 million as of both November 30, 2019 and May 31, 2019.
(2) Reflects unpaid principal balance of pledged loans.
(3) Excludes cash collateral pledged to secure debt. If there is an event of default under most of our indentures, we can only withdraw the excess collateral if we substitute cash or permitted investments of equal value.

As displayed above in Table 13, we had excess loans pledged as collateral totaling $2,624 million and $2,739 million as of November 30, 2019 and May 31, 2019, respectively. We typically pledge loans in excess of the required amount for the following reasons: (i) our distribution and power supply loans are typically amortizing loans that require scheduled principal payments over the life of the loan, whereas the debt securities issued under secured indentures and agreements typically have bullet maturities; (ii) distribution and power supply borrowers have the option to prepay their loans; and (iii) individual loans may become ineligible for various reasons, some of which may be temporary.

We provide additional information on our borrowings, including the maturity profile, below in “Liquidity Risk.” Refer to “Note 4—Loans—Pledging of Loans” for additional information related to pledged collateral. Also refer to “Note 5—Short-Term Borrowings,” “Note 7—Long-Term Debt,” “Note 8—Subordinated Deferrable Debt” and “Note 9—Members’ Subordinated Certificates” in our 2019 Form 10-K for a more detailed description of each of our debt product types.



25



Equity

Table 14 presents the components of total CFC equity and total equity as of November 30, 2019 and May 31, 2019.

Table 14: Equity
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
 
Change
Membership fees and educational fund:
 
 
 
 
 
 
Membership fees
 
$
970

 
$
969

 
$
1

Educational fund
 
1,473

 
2,013

 
(540
)
Total membership fees and educational fund
 
2,443

 
2,982

 
(539
)
Patronage capital allocated
 
797,756

 
860,578

 
(62,822
)
Members’ capital reserve
 
759,097

 
759,097

 

Total allocated equity
 
1,559,296

 
1,622,657

 
(63,361
)
Unallocated net income (loss):
 
 
 
 
 


Prior year-end cumulative derivative forward value losses(1)
 
(348,965
)
 
(30,831
)
 
(318,134
)
Current year derivative forward value losses(1)
 
(186,375
)
 
(318,134
)
 
131,759

Current period-end cumulative derivative forward value losses(1)
 
(535,340
)
 
(348,965
)
 
(186,375
)
Other unallocated net income
 
108,735

 
3,190

 
105,545

Unallocated net loss
 
(426,605
)
 
(345,775
)
 
(80,830
)
CFC retained equity
 
1,132,691

 
1,276,882

 
(144,191
)
Accumulated other comprehensive loss
 
(82
)
 
(147
)
 
65

Total CFC equity
 
1,132,609

 
1,276,735

 
(144,126
)
Noncontrolling interests
 
25,285

 
27,147

 
(1,862
)
Total equity
 
$
1,157,894

 
$
1,303,882

 
$
(145,988
)
____________________________ 
(1)Represents derivative forward value gains (losses) for CFC only, as total CFC equity does not include the noncontrolling interests of the variable interest entities NCSC and RTFC, which we are required to consolidate. See “Note 13—Business Segments” for the statements of operations for CFC.

Total equity decreased by $146 million to $1,158 million as of November 30, 2019, attributable to our reported net loss of $82 million during the six months ended November 30, 2019 and the patronage capital retirement of $63 million in September 2019.

In July 2019, the CFC Board of Directors authorized the allocation of fiscal year 2019 adjusted net income as follows: $97 million to members in the form of patronage capital; $71 million to the members’ capital reserve; and $1 million to the cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on non-GAAP adjusted net income, which excludes the impact of derivative forward value gains (losses). We provide a reconciliation of our adjusted net income to our reported net income and an explanation of the adjustments below in “Non-GAAP Financial Measures.”

In July 2019, the CFC Board of Directors also authorized the retirement of patronage capital totaling $63 million, consisting of $48 million, which represented 50% of the patronage capital allocation for fiscal year 2019, and $15 million, which represented the portion of the allocation from fiscal year 1994 net earnings that has been held for 25 years pursuant to the CFC Board of Directors policy. This amount was returned to members in cash in September 2019. The remaining portion of the amount allocated for fiscal year 2019 will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.

The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in 39 of the last 40 fiscal years; however, future retirements of allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice

26



for allocating and retiring net earnings at any time, subject to applicable laws. See “Item 1. Business—Allocation and Retirement of Patronage Capital” of our 2019 Form 10-K for additional information.
OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, we engage in financial transactions that are not presented on our condensed consolidated balance sheets, or may be recorded on our condensed consolidated balance sheets in amounts that are different from the full contract or notional amount of the transaction. Our off-balance sheet arrangements consist primarily of guarantees of member obligations and unadvanced loan commitments intended to meet the financial needs of our members.

Guarantees

We provide guarantees for certain contractual obligations of our members to assist them in obtaining various forms of financing. We use the same credit policies and monitoring procedures in providing guarantees as we do for loans and commitments. If a member defaults on its obligation, we are obligated to pay required amounts pursuant to our guarantees. Meeting our guarantee obligations satisfies the underlying obligation of our member systems and prevents the exercise of remedies by the guarantee beneficiary based upon a payment default by a member. In general, the member is required to repay any amount advanced by us with accrued interest, pursuant to the documents evidencing the member’s reimbursement obligation. Table 15 displays the notional amount of our outstanding guarantee obligations, by guarantee type and by company, as of November 30, 2019 and May 31, 2019.

Table 15: Guarantees Outstanding
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
 
Change
Guarantee type:
 
 
 
 
 
 
Long-term tax-exempt bonds
 
$
308,750

 
$
312,190

 
$
(3,440
)
Letters of credit
 
339,241

 
379,001

 
(39,760
)
Other guarantees
 
146,732

 
146,244

 
488

Total
 
$
794,723

 
$
837,435

 
$
(42,712
)
 
 
 
 
 
 
 
Company:
 
 

 
 
 
 
CFC
 
$
782,132

 
$
827,344

 
$
(45,212
)
NCSC
 
12,591

 
8,517

 
4,074

RTFC
 

 
1,574

 
(1,574
)
Total
 
$
794,723

 
$
837,435

 
$
(42,712
)

Of the total notional amount of our outstanding guarantee obligations of $795 million and $837 million as of November 30, 2019 and May 31, 2019, respectively, 56% and 55%, respectively, were secured by a mortgage lien on substantially all of the assets and future revenue of our member cooperatives for which we provide guarantees.

In addition to providing a guarantee on long-term tax-exempt bonds issued by member cooperatives totaling $309 million as of November 30, 2019, we also were the liquidity provider on $245 million of those tax-exempt bonds. As liquidity provider, we may be required to purchase bonds that are tendered or put by investors. Investors provide notice to the remarketing agent that they will tender or put a certain amount of bonds at the next interest rate reset date. If the remarketing agent is unable to sell such bonds to other investors by the next interest rate reset date, we have unconditionally agreed to purchase such bonds. We were not required to perform as liquidity provider pursuant to these obligations during the six months ended November 30, 2019 or the prior fiscal year.

We had outstanding letters of credit for the benefit of our members totaling $339 million as of November 30, 2019. These letters of credit relate to obligations for which we may be required to advance funds based on various trigger events specified in the letter of credit agreements. If we are required to advance funds, the member is obligated to repay the advance amount and accrued interest to us. In addition to these letters of credit, we had master letter of credit facilities in place as of November 30, 2019, under which we may be required to issue letters of credit to third parties for the benefit of

27



our members up to an additional $54 million as of November 30, 2019. All of our master letter of credit facilities as of November 30, 2019 were subject to material adverse change clauses at the time of issuance. Prior to issuing a letter of credit under these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and that the borrower is currently in compliance with the letter of credit terms and conditions.

Table 16 presents the maturities for each of the next five fiscal years and thereafter of the notional amount of our outstanding guarantee obligations of $795 million as of November 30, 2019.

Table 16: Maturities of Guarantee Obligations
 
 
 Outstanding
Amount
 
Maturities of Guarantee Obligations
(Dollars in thousands)
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
Guarantees
 
$
794,723

 
$
95,041

 
$
223,621

 
$
27,693

 
$
158,793

 
$
32,545

 
$
257,030


We recorded a guarantee liability of $13 million and $14 million as of November 30, 2019 and May 31, 2019, respectively, for our guarantee and liquidity obligations associated with our members’ debt. We provide additional information about our guarantee obligations in “Note 11—Guarantees.”

Unadvanced Loan Commitments

Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. Our line of credit commitments include both contracts that are subject to material adverse change clauses and contracts that are not subject to material adverse change clauses, while our long-term loan commitments are typically subject to material adverse change clauses.

Table 17 displays the amount of unadvanced loan commitments, which consist of line of credit and long-term loan commitments, as of November 30, 2019 and May 31, 2019.

Table 17: Unadvanced Loan Commitments
 
 
November 30, 2019
 
May 31, 2019
 
 
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
Change
Line of credit commitments:
 
 
 
 
 
 
 
 
 
 
Conditional(1)
 
$
4,845,520

 
36
%
 
$
4,845,306

 
37
%
 
$
214

Unconditional(2)
 
3,070,365

 
23

 
2,943,616

 
22

 
126,749

Total line of credit unadvanced commitments
 
7,915,885


59

 
7,788,922

 
59

 
126,963

Total long-term loan unadvanced commitments(1)
 
5,410,294


41

 
5,448,636

 
41

 
(38,342
)
Total unadvanced loan commitments
 
$
13,326,179


100
%
 
$
13,237,558

 
100
%
 
$
88,621

____________________________ 
(1)Represents amount related to facilities that are subject to material adverse change clauses.
(2)Represents amount related to facilities that are not subject to material adverse change clauses.

Table 18 presents the amount of unadvanced loan commitments, by loan type, as of November 30, 2019 and the maturities of the commitment amounts for each of the next five fiscal years and thereafter.


28



Table 18: Notional Maturities of Unadvanced Loan Commitments
 
 
Available
Balance
 
Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
Line of credit loans
 
$
7,915,885

 
$
437,701

 
$
4,059,897

 
$
492,117

 
$
1,362,948

 
$
1,168,481

 
$
394,741

Long-term loans
 
5,410,294

 
230,642

 
622,895

 
1,349,256

 
1,022,784

 
1,737,285

 
447,432

Total
 
$
13,326,179

 
$
668,343

 
$
4,682,792

 
$
1,841,373

 
$
2,385,732

 
$
2,905,766

 
$
842,173


Unadvanced line of credit commitments accounted for 59% of total unadvanced loan commitments as of November 30, 2019, while unadvanced long-term loan commitments accounted for 41% of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years and generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists. Our unadvanced long-term loan commitments generally have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $5,410 million will be advanced prior to the expiration of the commitment.

Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $13,326 million as of November 30, 2019 is not necessarily representative of our future funding requirements.

Unadvanced Loan Commitments—Conditional

The majority of our line of credit commitments and all our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $10,256 million and $10,294 million as of November 30, 2019 and May 31, 2019, respectively, and accounted for 77% and 78%, respectively, of the combined total of unadvanced line of credit and long-term loan commitments as of both November 30, 2019 and May 31, 2019. Prior to making advances on these facilities, we confirm that there has been no material adverse change in the borrower’s business or condition, financial or otherwise, since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by use of proceeds restrictions, imposition of borrower-specific restrictions, or by additional conditions that must be met prior to advancing funds. Since we generally do not charge a fee for the borrower to have an unadvanced amount on a loan facility that is subject to a material adverse change clause, our borrowers tend to request amounts in excess of their immediate estimated loan requirements.

Unadvanced Loan Commitments—Unconditional

Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling $3,070 million and $2,944 million as of November 30, 2019 and May 31, 2019, respectively. For contracts not subject to a material adverse change clause, we are generally required to advance amounts on the committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.

Syndicated loan facilities, where the pricing is set at a spread over a market index rate as agreed upon by all of the participating financial institutions based on market conditions at the time of syndication, accounted for 90% of unconditional line of credit commitments as of November 30, 2019. The remaining 10% represented unconditional committed line of credit loans, for which any new advance would be made at rates determined by us.

Table 19 presents the maturities for each of the next five fiscal years and thereafter of the notional amount of unconditional committed lines of credit not subject to a material adverse change clause as of November 30, 2019.


29



Table 19: Maturities of Notional Amount of Unconditional Committed Lines of Credit
 
 
Available
Balance
 
Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands)
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
Committed lines of credit
 
$
3,070,365

 
$
18,073

 
$
417,498

 
$
173,335

 
$
1,082,986

 
$
897,894

 
$
480,579


See “MD&A—Off-Balance Sheet Arrangements” in our 2019 Form 10-K for additional information on our off-balance sheet arrangements.
RISK MANAGEMENT

Overview

We face a variety of risks that can significantly affect our financial performance, liquidity, reputation and ability to meet the expectations of our members, investors and other stakeholders. As a financial services company, the major categories of risk exposures inherent in our business activities include credit risk, liquidity risk, market risk and operational risk. These risk categories are summarized below.

Credit risk is the risk that a borrower or other counterparty will be unable to meet its obligations in accordance with agreed-upon terms.

Liquidity risk is the risk that we will be unable to fund our operations and meet our contractual obligations or that we will be unable to fund new loans to borrowers at a reasonable cost and tenor in a timely manner.

Market risk is the risk that changes in market variables, such as movements in interest rates, may adversely affect the match between the timing of the contractual maturities, re-pricing and prepayments of our financial assets and the related financial liabilities funding those assets.

Operational risk is the risk of loss resulting from inadequate or failed internal controls, processes, systems, human error or external events. Operational risk also includes compliance risk, fiduciary risk, reputational risk and litigation risk.

Effective risk management is critical to our overall operations and to achieving our primary objective of providing cost-based financial products to our rural electric members while maintaining the sound financial results required for investment-grade credit ratings on our rated debt instruments. Accordingly, we have a risk-management framework that is intended to govern the principal risks we face in conducting our business and the aggregate amount of risk we are willing to accept, referred to as risk appetite, in the context of CFC’s mission and strategic objectives and initiatives. We provide information on our risk management framework in our 2019 Form 10-K under “Item 7. MD&A—Risk Management—Risk Management Framework.”
CREDIT RISK

Our loan portfolio, which represents the largest component of assets on our balance sheet, and guarantees account for the substantial majority of our credit risk exposure. We also engage in certain non-lending activities that may give rise to credit and counterparty settlement risk, including the purchase of investment securities and entering into derivative transactions to manage interest rate risk. Our primary credit exposure is to rural electric cooperatives that provide essential electric services to end-users, the majority of which are residential customers. We also have a limited portfolio of loans to not-for-profit and for-profit telecommunication companies. We provide a discussion of our credit risk management processes and activities in our 2019 Form 10-K under “Item 7. MD&A—Credit Risk—Credit Risk Management.”






30



Loan Portfolio Credit Risk

Below we provide information on the credit risk profile of our loan portfolio, including security provisions, loan concentration, credit performance and our allowance for loan losses.

Security Provisions

Except when providing line of credit loans, we generally lend to our members on a senior secured basis. Long-term loans are generally secured on parity with other secured lenders (primarily RUS), if any, by all assets and revenue of the borrower with exceptions typical in utility mortgages. Line of credit loans are generally unsecured. In addition to the collateral pledged to secure our loans, distribution and power supply borrowers also are required to set rates charged to customers to achieve certain specified financial ratios.

Table 20 presents, by loan type and by company, the amount and percentage of secured and unsecured loans in our loan portfolio as of November 30, 2019 and May 31, 2019. Of our total loans outstanding, 93% were secured and 7% were unsecured as of November 30, 2019. In comparison, of our total loans outstanding, 92% were secured and 8% were unsecured as of May 31, 2019.

Table 20: Loan Portfolio Security Profile
 
 
November 30, 2019
(Dollars in thousands)
 
Secured
 
% of Total
 
Unsecured
 
% of Total
 
Total
Loan type:
 
 
 
 
 
 
 
 
 
 
Long-term loans:
 
 
 
 
 
 
 
 
 
 
Long-term fixed-rate loans
 
$
23,496,376

 
98
%
 
$
365,208

 
2
%
 
$
23,861,584

Long-term variable-rate loans
 
924,814

 
99

 
6,135

 
1

 
930,949

Total long-term loans
 
24,421,190

 
99

 
371,343

 
1

 
24,792,533

Line of credit loans
 
138,026

 
8

 
1,496,320

 
92

 
1,634,346

Total loans outstanding(1)
 
$
24,559,216

 
93

 
$
1,867,663

 
7

 
$
26,426,879

 
 
 
 
 
 
 
 
 
 
 
Company:
 
 
 
 
 
 
 
 
 
 
CFC
 
$
23,595,827

 
93
%
 
$
1,772,449

 
7
%
 
$
25,368,276

NCSC
 
625,188

 
89

 
77,091

 
11

 
702,279

RTFC
 
338,201

 
95

 
18,123

 
5

 
356,324

Total loans outstanding(1)
 
$
24,559,216

 
93

 
$
1,867,663

 
7

 
$
26,426,879



31



 
 
May 31, 2019
(Dollars in thousands)
 
Secured
 
% of Total
 
Unsecured
 
% of Total
 
Total
Loan type:
 
 
 
 
 
 
 
 
 
 
Long-term loans:
 
 
 
 
 
 
 
 
 
 
Long-term fixed-rate loans
 
$
22,674,330

 
98
%
 
$
419,923

 
2
%
 
$
23,094,253

Long-term variable-rate loans
 
1,058,434

 
99

 
8,446

 
1

 
1,066,880

Total long-term loans
 
23,732,764

 
98

 
428,369

 
2

 
24,161,133

Line of credit loans
 
121,741

 
7

 
1,622,790

 
93

 
1,744,531

Total loans outstanding(1)
 
$
23,854,505

 
92

 
$
2,051,159

 
8

 
$
25,905,664

 
 
 
 
 
 
 
 
 
 
 
Company:
 
 
 
 
 
 
 
 
 
 
CFC
 
$
22,861,414

 
92
%
 
$
1,956,262

 
8
%
 
$
24,817,676

NCSC
 
664,618

 
89

 
78,270

 
11

 
742,888

RTFC
 
328,473

 
95

 
16,627

 
5

 
345,100

Total loans outstanding(1)
 
$
23,854,505

 
92

 
$
2,051,159

 
8

 
$
25,905,664

____________________________ 
(1) Represents the unpaid principal amount of loans as of the end of each period presented and excludes deferred loan origination costs of $11 million as of both November 30, 2019 and May 31, 2019.

As part of our strategy in managing our credit risk exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac in fiscal year 2016. Under this agreement, we may designate certain loans to be covered under the commitment, as approved by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The outstanding principal balance of loans covered under this agreement totaled $593 million as of November 30, 2019, compared with $619 million as of May 31, 2019. No loans have been put to Farmer Mac for purchase pursuant to this agreement. Our credit exposure is also mitigated by long-term loans guaranteed by RUS. Guaranteed RUS loans totaled $150 million and $154 million as of November 30, 2019 and May 31, 2019, respectively.

Credit Concentration

Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-industry and single-obligor concentration risks. Outstanding loans to electric utility organizations represented approximately 99% of our total outstanding loan portfolio as of November 30, 2019, unchanged from May 31, 2019. Although our organizational structure and mission results in single-industry concentration, we serve a geographically diverse group of electric and telecommunications borrowers throughout the United States, with a total of 898 borrowers located in 49 states as of November 30, 2019. Loans to borrowers in Texas accounted for 15% of total loans outstanding as of both November 30, 2019 and May 31, 2019, representing the largest concentration of outstanding loans to borrowers and the largest number of borrowers in any one state.

Single-Obligor Concentration

Table 21 displays the outstanding loan exposure for the 20 largest borrowers, by company, as of November 30, 2019 and May 31, 2019. The 20 largest borrowers consisted of 11 distribution systems, eight power supply systems and one NCSC associate as of November 30, 2019. The 20 largest borrowers consisted of 10 distribution systems, nine power supply systems and one NCSC associate as of May 31, 2019. The largest total exposure to a single borrower or controlled group represented approximately 2% of total loans outstanding as of both November 30, 2019 and May 31, 2019.

32



Table 21: Loan Exposure to 20 Largest Borrowers
  
 
November 30, 2019
 
May 31, 2019
 
Change
(Dollars in thousands)
 
Amount
 
% of Total
 
Amount
 
% of Total
 
By company:
 
 
 
 
 
 
 
 
 
 
CFC
 
$
5,441,259

 
21
 %
 
$
5,369,879

 
21
 %
 
$
71,380

NCSC
 
248,476

 
1

 
245,559

 
1

 
2,917

Total loan exposure to 20 largest borrowers
 
5,689,735

 
22

 
5,615,438

 
22

 
74,297

Less: Loans covered under Farmer Mac standby purchase commitment
 
(350,983
)
 
(1
)
 
(360,012
)
 
(1
)
 
9,029

Net loan exposure to 20 largest borrowers
 
$
5,338,752

 
21
 %
 
$
5,255,426

 
21
 %
 
$
83,326


Although CFC has been exposed to single-industry and single-obligor concentrations since inception in 1969, we historically have experienced limited defaults and very low credit losses in our electric loan portfolio. The likelihood of default and loss for our electric cooperative borrowers, which account for 99% of our outstanding loans as of November 30, 2019, has been low due to several factors. First, as discussed above, we generally lend to our members on a senior secured basis. Second, electric cooperatives typically are consumer-owned, not-for-profit entities that provide an essential service to end-users, the majority of which are residential customers. Third, electric cooperatives face limited competition, as they tend to operate in exclusive territories not serviced by public investor-owned utilities. Fourth, the majority operate in states where electric cooperatives are not subject to rate regulation. Thus, they are able to make rate adjustments to pass along increased costs to the end customer without first obtaining state regulatory approval, allowing them to cover operating costs and generate sufficient earnings and cash flows to service their debt obligations. Finally, they tend to adhere to a conservative business strategy model that has historically resulted in a relatively stable, resilient operating environment and overall strong financial performance and credit strength for the electric cooperative network.

Credit Quality

Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, the internal risk ratings of our borrowers, troubled debt restructurings, nonperforming and impaired loans, charge-offs and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Internal risk ratings and payment status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan portfolio.

The overall credit quality of our loan portfolio remained high, as evidenced by our strong credit performance metrics, including low levels of criticized exposure. As displayed in Table 20 above, 93% and 92% of our total outstanding loans were secured as of November 30, 2019 and May 31, 2019, respectively. We had no delinquent or nonperforming loans as of November 30, 2019 and May 31, 2019. In addition, we had no loan defaults or charge-offs during the six months ended November 30, 2019.

Borrower Risk Ratings

Our borrower risk ratings are intended to align with banking regulatory agency credit risk rating definitions of pass and criticized classifications, with loans classified as criticized further classified as special mention, substandard or doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Loans with borrowers classified as criticized totaled $199 million, or 0.75%, of total loans outstanding as of November 30, 2019. Of this amount, $173 million, was classified as substandard. In comparison, loans with borrowers classified as criticized totaled $202 million, or 0.78%, of total loans outstanding as of May 31, 2019. Of this amount, $176 million was classified as substandard. We did not have any loans classified as doubtful as of November 30, 2019 or May 31, 2019. See “Note 4—Loans” for a description of each of the risk rating classifications.

Troubled Debt Restructurings

We actively monitor problem loans and, from time to time, attempt to work with borrowers to manage such exposures through loan workouts or modifications that better align with the borrower’s current ability to pay. A loan restructuring or

33



modification of terms is accounted for as a troubled debt restructuring (“TDR”) if, for economic or legal reasons related to the borrower’s financial difficulties, a concession is granted to the borrower that we would not otherwise consider. TDR loans generally are initially placed on nonaccrual status, although in many cases such loans were already on nonaccrual status prior to modification. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings. These loans may be returned to performing status and the accrual of interest resumed if the borrower performs under the modified terms for an extended period of time, and we expect the borrower to continue to perform in accordance with the modified terms. In certain limited circumstances in which a TDR loan is current at the modification date, the loan may remain on accrual status at the time of modification.

Table 22 presents the carrying value of loans modified as TDRs and the performance status as of November 30, 2019 and May 31, 2019. Our last modification of a loan that met the definition of a TDR occurred in fiscal year 2017. Although TDR loans may be returned to performing status if the borrower performs under the modified terms of the loan for an extended period of time, TDR loans are considered individually impaired.

Table 22: Troubled Debt Restructured Loans
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Carrying Amount
 
% of Total Loans Outstanding
 
Carrying Amount
 
% of Total Loans Outstanding
TDR loans:
 
 
 
 
 
 
 
 
CFC
 
$
5,755

 
0.02
%
 
$
6,261

 
0.03
%
RTFC
 
5,342

 
0.02

 
5,592

 
0.02

Total TDR loans
 
$
11,097

 
0.04
%
 
$
11,853

 
0.05
%
 
 
 
 
 
 
 
 
 
Performance status of TDR loans:
 
 
 
 
 
 
 
 
Performing TDR loans
 
$
11,097

 
0.04
%
 
$
11,853

 
0.05
%
 
As indicated in Table 22 above, we did not have any TDR loans classified as nonperforming as of November 30, 2019 or May 31, 2019.

Nonperforming Loans

In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR loan. We classify such loans as nonperforming at the earlier of the date when we determine: (i) interest or principal payments on the loan is past due 90 days or more; (ii) as a result of court proceedings, the collection of interest or principal payments based on the original contractual terms is not expected; or (iii) the full and timely collection of interest or principal is otherwise uncertain. Once a loan is classified as nonperforming, we generally place the loan on nonaccrual status. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed against earnings. We have not had any loans classified as nonperforming other than TDR loans, since the fiscal year ended May 31, 2014.

Net Charge-Offs

Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We had no loan defaults or charge-offs during the six months ended November 30, 2019 and 2018.

Historical Loan Losses

In its 50-year history, CFC has experienced only 16 defaults, of which 10 resulted in no loss and six resulted in cumulative historical net charge-offs of $86 million for our electric utility loan portfolio. Of this amount, $67 million was attributable to electric utility power supply cooperatives and $19 million was attributable to electric distribution cooperatives. We discuss

34



the reasons loans to electric utility cooperatives, our principal lending market, typically have a relatively low risk of default above under “Credit Concentration.”

In comparison, since RTFC’s inception in 1987, we have had 15 defaults and cumulative net charge-offs attributable to telecommunication borrowers totaling $427 million, the most significant of which was a charge-off of $354 million in fiscal year 2011. This charge-off related to outstanding loans to Innovative Communications Corporation (“ICC”), a former RTFC member, and the transfer of ICC’s assets in foreclosure to Caribbean Asset Holdings, LLC.

Outstanding loans to electric utility organizations totaled $26,071 million and accounted for 99% of our total outstanding loan portfolio as of November 30, 2019, while outstanding RTFC telecommunications loans totaled $356 million and accounted for 1% of our total outstanding loan portfolio as of November 30, 2019.

We provide additional information on the credit quality of our loan portfolio in “Note 4—Loans.”

Allowance for Loan Losses
 
The allowance for loan losses represents management’s estimate of probable losses inherent in our loan portfolio as of each balance sheet date. We determine the allowance based on borrower risk ratings, historical loss experience, specific problem loans, economic conditions and other pertinent factors that, in management’s judgment, may affect the risk of loss in our loan portfolio.

Table 23 summarizes changes in the allowance for loan losses for the three and six months ended November 30, 2019 and 2018, and provides a comparison of the allowance by company as of November 30, 2019 and May 31, 2019.

Table 23: Allowance for Loan Losses
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Beginning balance
 
$
17,565

 
$
18,692

 
$
17,535

 
$
18,801

Benefit for loan losses
 
(1,045
)
 
(1,788
)
 
(1,015
)
 
(1,897
)
Ending balance
 
$
16,520

 
$
16,904

 
$
16,520

 
$
16,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 30, 2019
 
May 31, 2019
Allowance for loan losses by company:
 
 
 
 
 
 
 
 
CFC
 
 
 
 
 
$
13,076

 
$
13,120

NCSC
 
 
 
 
 
810

 
2,007

RTFC
 
 
 
 
 
2,634

 
2,408

Total
 
 
 
 
 
$
16,520

 
$
17,535

 
 
 
 
 
 
 
 
 
Allowance coverage ratios:
 
 
 
 
 
 
 
 
Total loans outstanding(1) 
 
 
 
 
 
$
26,426,879

 
$
25,905,664

Percentage of total loans outstanding
 
 
 
 
 
0.06
%
 
0.07
%
____________________________ 
(1) Represents the unpaid principal amount of loans as of the end of each period presented and excludes unamortized deferred loan origination costs of $11 million as of both November 30, 2019 and May 31, 2019.

Our allowance for loan losses was $17 million as of November 30, 2019, compared with $18 million as of May 31, 2019. The allowance coverage ratio was 0.06% and 0.07% as of November 30, 2019 and May 31, 2019, respectively. We had no loans classified as nonperforming as of November 30, 2019 or May 31, 2019. We experienced no charge-offs during the three and six months ended November 30, 2019 and 2018. Loans designated as individually impaired totaled $11 million and $12 million as of November 30, 2019 and May 31, 2019, respectively, and the specific allowance related to those loans totaled $1 million as of both November 30, 2019 and May 31, 2019.


35



See “MD&A—Critical Accounting Policies and Estimates—Allowance for Loan Losses” and “Note 1—Summary of Significant Accounting Policies” in our 2019 Form 10-K for additional information on the methodology for determining our allowance for loan losses and the key assumptions. See “Note 4—Loans” of this Report for additional information on the credit quality of our loan portfolio.

Counterparty Credit Risk

We are exposed to counterparty credit risk related to the performance of the parties with which we enter into financial transactions, primarily for derivative instruments, cash and time deposit accounts and our investment security holdings. To mitigate this risk, we only enter into these transactions with financial institutions with investment-grade ratings. Our cash and time deposits with financial institutions generally have an original maturity of less than one year.

We manage our derivative counterparty credit risk by monitoring the overall credit worthiness of each counterparty based on our internal counterparty credit risk scoring model; using counterparty-specific credit risk limits; executing master netting arrangements; and diversifying our derivative transactions among multiple counterparties. We also require that our derivative counterparties be a participant in one of our committed bank revolving line of credit agreements. Our active derivative counterparties had credit ratings ranging from Aa2 to Baa2 by Moody’s Investors Service (“Moody’s”) and from AA- to BBB+ by S&P Global Inc. (“S&P”) as of November 30, 2019. Our largest counterparty exposure, based on the outstanding notional amount, represented approximately 23% of the total outstanding notional amount of derivatives as of both November 30, 2019 and May 31, 2019.

Credit Risk-Related Contingent Features

Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as defined in the agreement, as of the termination date.

Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of November 30, 2019. Both Moody’s and S&P had our ratings on stable outlook as of November 30, 2019. Table 24 displays the notional amounts of our derivative contracts with rating triggers as of November 30, 2019, and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the counterparty's master netting agreements. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.

Table 24: Rating Triggers for Derivatives
(Dollars in thousands)
 
Notional
 Amount
 
Payable Due From CFC
 
Receivable Due to CFC
 
Net (Payable)/Receivable
Impact of rating downgrade trigger:
 
 
 
 
 
 
 
 
Falls below A3/A-(1)
 
$
47,955

 
$
(9,457
)
 
$

 
$
(9,457
)
Falls below Baa1/BBB+
 
6,861,619

 
(346,099
)
 

 
(346,099
)
Falls to or below Baa2/BBB (2)
 
479,629

 
(13,704
)
 

 
(13,704
)
Falls below Baa3/BBB-
 
221,078

 
(12,385
)
 

 
(12,385
)
Total
 
$
7,610,281

 
$
(381,645
)
 
$

 
$
(381,645
)
____________________________ 
(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.  
(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.


36



We have outstanding notional amount of derivatives with one counterparty subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch Ratings Inc. (“Fitch”), respectively, which is not included in the above table, totaling $165 million as of November 30, 2019. These contracts were in an unrealized loss position of $31 million as of November 30, 2019.

The aggregate fair value amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $402 million as of November 30, 2019. There were no counterparties that fell below the rating trigger levels in our interest swap contracts as of November 30, 2019. If a counterparty has a credit rating that falls below the rating trigger level specified in the interest swap contract, we have the option to terminate all derivatives with the counterparty. However, we generally do not terminate such agreements prematurely because our interest rate swaps are critical to our matched funding strategy to mitigate interest rate risk.
 
See “Item 1A. Risk Factors” in our 2019 Form 10-K for additional information about credit risk related to our business.
LIQUIDITY RISK

We define liquidity as the ability to convert assets into cash quickly and efficiently, maintain access to readily available funding and rollover or issue new debt, under both normal operating conditions and periods of CFC-specific and/or market stress, to ensure that we can meet borrower loan requests, pay current and future obligations and fund our operations on a cost-effective basis. Our primary sources of liquidity include cash flows from operations, member loan repayments, committed bank revolving lines of credit, committed loan facilities under the Guaranteed Underwriter Program, revolving note purchase agreements with Farmer Mac and our ability to issue debt in the capital markets, to our members and in private placements. We provide a discussion of our liquidity risk-management framework and activities undertaken to manage liquidity risk in our 2019 Form 10-K under “Item 7. MD&A—Liquidity Risk—Liquidity Risk Management.”

Available Liquidity

As part of our strategy in managing liquidity risk and meeting our liquidity objectives, we seek to maintain a substantial level of on-balance sheet and off-balance sheet sources of liquidity that are readily available for access to meet our near-term liquidity needs. Table 25 presents the sources of our available liquidity as of November 30, 2019 and May 31, 2019.

Table 25: Available Liquidity
 
 
November 30, 2019
 
May 31, 2019
(Dollars in millions)
 
Total
 
Accessed
 
Available
 
Total
 
Accessed
 
Available
Cash and cash equivalents
 
$
114

 
$

 
$
114

 
$
178

 
$

 
$
178

Committed bank revolving line of credit agreements—unsecured(1)
 
2,725

 
3

 
2,722

 
2,975

 
3

 
2,972

Guaranteed Underwriter Program committed facilities—secured(2)
 
7,298

 
5,948

 
1,350

 
7,298

 
5,948

 
1,350

Farmer Mac revolving note purchase agreement, dated March 24, 2011, as amended—secured(3)
 
5,200

 
2,945

 
2,255

 
5,200

 
3,055

 
2,145

Farmer Mac revolving note purchase agreement, dated July 31, 2015, as amended—secured(4)
 
300

 
150

 
150

 
300

 

 
300

Total
 
$
15,637

 
$
9,046

 
$
6,591

 
$
15,951

 
$
9,006

 
$
6,945

____________________________ 
(1)The committed bank revolving line of credit agreements consist of a three-year and a five-year line of credit agreement. The accessed amount of $3 million as of both November 30, 2019 and May 31, 2019, relates to letters of credit issued pursuant to the five-year line of credit agreement.
(2)The committed facilities under the Guaranteed Underwriter Program are not revolving.
(3)Availability subject to market conditions.
(4) This Farmer Mac revolving note purchase agreement was terminated effective December 20, 2019.



37



We believe we have sufficient liquidity from the available on- and off-balance sheet liquidity sources presented above in Table 25 and our ability to issue debt to meet demand for member loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months.

Borrowing Capacity Under Current Facilities

Following is a discussion of our borrowing capacity and key terms and conditions under our revolving line of credit agreements with banks and committed loan facilities under the Guaranteed Underwriter Program and revolving note purchase agreements with Farmer Mac.

Committed Bank Revolving Line of Credit Agreements—Unsecured

Our committed bank revolving lines of credit may be used for general corporate purposes; however, we generally rely on them as a backup source of liquidity for our member and dealer commercial paper. We had $2,725 million of commitments under committed bank revolving line of credit agreements as of November 30, 2019. Under our current committed bank revolving line of credit agreements, we have the ability to request up to $300 million of letters of credit, which would result in a reduction in the remaining available amount under the facilities.

On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments totaling $125 million under the three-year agreement and $125 million under the five-year agreement. The total commitment amount under the amended three-year and five-year bank revolving line of credit agreements is $1,315 million and $1,410 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,725 million.

Table 26 presents the total commitment, the net amount available for use and the outstanding letters of credit under our committed bank revolving line of credit agreements as of November 30, 2019. We did not have any outstanding borrowings under our bank revolving line of credit agreements as of November 30, 2019.

Table 26: Committed Bank Revolving Line of Credit Agreements
 
 
November 30, 2019
 
 
 
 
(Dollars in millions)
 
Total Commitment
 
Letters of Credit Outstanding
 
Net Available for Advance
 
Maturity
 
Annual Facility Fee (1)
3-year agreement
 
$
1,315

 
$

 
$
1,315

 
November 28, 2022
 
7.5 bps
5-year agreement
 
1,410

 
3

 
1,407

 
November 28, 2023
 
10 bps
Total
 
$
2,725

 
$
3

 
$
2,722

 
 
 
 
____________________________ 
(1)Facility fee based on CFC’s senior unsecured credit ratings in accordance with the established pricing schedules at the inception of the related agreement.

Our committed bank revolving line of credit agreements do not contain a material adverse change clause or rating triggers that would limit the banks’ obligations to provide funding under the terms of the agreements; however, we must be in compliance with the covenants to draw on the facilities. We have been and expect to continue to be in compliance with the covenants under our committed bank revolving line of credit agreements. As such, we could draw on these facilities to repay dealer or member commercial paper that cannot be rolled over. See “Financial Ratios and Debt Covenants” below for additional information, including the specific financial ratio requirements under our committed bank revolving line of credit agreements.

Guaranteed Underwriter Program Committed Facilities—Secured

Under the Guaranteed Underwriter Program, we can borrow from the Federal Financing Bank and use the proceeds to make new loans and refinance existing indebtedness. As part of the program, we pay fees, based on outstanding borrowings supporting the USDA Rural Economic Development Loan and Grant program. The borrowings under this program are guaranteed by RUS.


38



We had up to $1,350 million available for access under the Guaranteed Underwriter Program as of November 30, 2019. Of this amount, $600 million is available for advance through July 15, 2022 and $750 million is available for advance through July 15, 2023. On September 25, 2019, we received a commitment letter for the guarantee by RUS of a $500 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program.

We are required to pledge eligible distribution system loans or power supply system loans as collateral in an amount at least equal to the total outstanding borrowings under the Guaranteed Underwriter Program. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on pledged collateral.

Farmer Mac Revolving Note Purchase Agreements—Secured

As indicated in Table 25, we had two revolving note purchase agreements with Farmer Mac as of November 30, 2019, which together allowed us to borrow up to $5,500 million from Farmer Mac. Under the first revolving note purchase agreement, dated March 24, 2011, as amended, we can borrow up to $5,200 million as of November 30, 2019, at any time, subject to market conditions, through January 11, 2022. This date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had outstanding secured notes payable totaling $2,945 million and $3,055 million as of November 30, 2019 and May 31, 2019, respectively, under this Farmer Mac revolving note purchase agreement. The available borrowing amount totaled $2,255 million as of November 30, 2019.

Under our second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, as amended, we could borrow up to $300 million at any time through December 20, 2023 at a fixed spread over LIBOR. This agreement also allowed us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Under this revolving note purchase agreement, we had outstanding secured notes payable totaling $150 million and an available borrowing amount of $150 million as of November 30, 2019. We had no notes payable outstanding under this agreement as of May 31, 2019. On November 14, 2019, we provided notice to Farmer Mac of termination of the $300 million revolving note purchase agreement, effective December 20, 2019. We repaid the outstanding secured notes payable of $150 million on December 4, 2019, prior to termination of the agreement.

Under the terms of the first Farmer Mac revolving note purchase agreement of $5,200 million discussed above, the commitment amount increases by $300 million in the event of termination of the second revolving note purchase agreement of $300 million. As a result of the termination of the second revolving note purchase agreement, the commitment amount under the $5,200 million revolving note purchase agreement increased to $5,500 million, effective December 20, 2019.

Pursuant to both Farmer Mac revolving note purchase agreements, we are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding. See “Consolidated Balance Sheet Analysis—Debt—Collateral Pledged” and “Note 4—Loans” for additional information on pledged collateral.

Short-Term Borrowings and Long-Term and Subordinated Debt

Additional funding is provided by short-term borrowings and issuances of long-term and subordinated debt. We rely on short-term borrowings as a source to meet our daily, near-term funding needs. Long-term and subordinated debt represents the most significant component of our funding. The issuance of long-term debt allows us to reduce our reliance on short-term borrowings and effectively manage our refinancing and interest rate risk.

Short-Term Borrowings

Our short-term borrowings consist of commercial paper, which we offer to members and dealers, select notes and daily liquidity fund notes offered to members, and bank-bid notes and medium-term notes offered to members and dealers.


39



Table 27 displays the composition, by funding source, of our short-term borrowings as of November 30, 2019 and May 31, 2019. Member borrowings accounted for 75% of total short-term borrowings as of November 30, 2019, compared with 74% of total short-term borrowings as of May 31, 2019.

Table 27: Short-Term BorrowingsFunding Sources
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Amount
 Outstanding
 
% of Total Short-Term Borrowings
 
Amount
Outstanding
 
% of Total Short-Term Borrowings
Funding source:
 
 
 
 
 
 
 
 
Members
 
$
3,600,162

 
75
%
 
$
2,663,110

 
74
%
Private placement—Farmer Mac notes payable
 
150,000

 
3

 

 

Capital markets
 
1,038,862

 
22

 
944,616

 
26

Total
 
$
4,789,024

 
100
%
 
$
3,607,726

 
100
%

Table 28 displays the composition, by product type, of our short-term borrowings as of November 30, 2019 and May 31, 2019.

Table 28: Short-Term Borrowings
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Amount
 Outstanding
 
% of Total Debt Outstanding
 
Amount
Outstanding
 
% of Total Debt Outstanding
Short-term borrowings:
 
 
 
 
 
 
 
 
Commercial paper:
 
 
 
 
 
 
 
 
Commercial paper to dealers, net of discounts
 
$
1,038,862

 
4
%
 
$
944,616

 
4
%
Commercial paper to members, at par
 
1,371,902

 
5

 
1,111,795

 
4

Total commercial paper
 
2,410,764

 
9

 
2,056,411

 
8

Select notes to members
 
1,470,579

 
6

 
1,023,952

 
4

Daily liquidity fund notes to members
 
508,169

 
2

 
298,817

 
1

Medium-term notes sold to members
 
249,512

 
1

 
228,546

 
1

Farmer Mac revolving facility
 
150,000

 
1

 

 

Total short-term borrowings
 
$
4,789,024

 
19
%
 
$
3,607,726

 
14
%

Our short-term borrowings totaled $4,789 million and accounted for 19% of total debt outstanding as of November 30, 2019, compared with $3,608 million, or 14% of total debt outstanding as of May 31, 2019. Of the total commercial paper, $1,039 million, or 4% of total debt outstanding, was issued to dealers as of November 30, 2019, compared with $945 million, or 4% of total debt outstanding, that was issued to dealers as of May 31, 2019. Our intent is to manage our short-term wholesale funding risk by maintaining outstanding dealer commercial paper at an amount below $1,250 million for the foreseeable future.

Long-Term and Subordinated Debt

In addition to access to private debt facilities, we also issue debt in the public capital markets. Pursuant to Rule 405 of the Securities Act, we are classified as a “well-known seasoned issuer.” In September 2019, we filed a new shelf registration statement for our collateral trust bonds under which we can issue an unlimited amount of collateral trust bonds until September 2022. See “Item 7. MD&A—Liquidity Risk” in our 2019 Form 10-K for additional information on our shelf registration statements with the SEC.

As discussed in Consolidated Balance Sheet Analysis—Debt, long-term and subordinated debt totaled $20,776 million and accounted for 81% of total debt outstanding as of November 30, 2019, from $21,554 million, or 86%, of total debt

40



outstanding as of May 31, 2019. Table 29 summarizes long-term and subordinated debt issuances and repayments during the six months ended November 30, 2019.

Table 29: Issuances and Repayments of Long-Term and Subordinated Debt(1) 
 
 
Six Months Ended November 30, 2019
(Dollars in thousands)
 
Issuances
 
Repayments(2)
 
Change
Long-term and subordinated debt activity:
 
 
 
 
 
 
Collateral trust bonds
 
$

 
$
305,000

 
$
(305,000
)
Guaranteed Underwriter Program notes payable
 

 
46,709

 
(46,709
)
Farmer Mac notes payable
 

 
109,960

 
(109,960
)
Medium-term notes sold to members
 
160,595

 
134,136

 
26,459

Medium-term notes sold to dealers
 

 
345,022

 
(345,022
)
Other notes payable
 

 
6,000

 
(6,000
)
Members’ subordinated certificates
 
1,427

 
3,504

 
(2,077
)
Total
 
$
162,022

 
$
950,331

 
$
(788,309
)
____________________________ 
(1)Amounts exclude unamortized debt issuance costs and discounts.
(2)Repayments include principal maturities, scheduled amortization payments, repurchases and redemptions.

Table 30 summarizes the scheduled amortization of the principal amount of long-term debt, subordinated deferrable debt and members’ subordinated certificates as of November 30, 2019.

Table 30: Principal Maturity of Long-Term and Subordinated Debt
(Dollars in thousands)
 
Amount
     Maturing (1)
 
% of Total
Fiscal year ending:
 
 
 
 
May 31, 2020
 
$
717,037

 
3
%
May 31, 2021
 
1,980,053

 
10

May 31, 2022
 
1,976,692

 
10

May 31, 2023
 
1,198,691

 
6

May 31, 2024
 
1,092,521

 
5

Thereafter
 
13,810,478

 
66

Total
 
$
20,775,472

 
100
%
____________________________ 
(1)Excludes $0.06 million in subscribed and unissued member subordinated certificates for which a payment has been received. Member loan subordinated certificates totaling $252 million amortize annually based on the unpaid principal balance of the related loan.

We provide additional information on our financing activities above under “Consolidated Balance Sheet Analysis—Debt.”

Investment Portfolio

In addition to our primary sources of liquidity discussed above, we have an investment portfolio, which totaled $637 million and $653 million as of November 30, 2019 and May 31, 2019, respectively, composed of equity securities and held-to-maturity investment securities. The decrease in our investment portfolio of $16 million during the six months ended November 30, 2019 was primarily attributable to the redemption by Farmer Mac of its Series B non-cumulative preferred stock on June 12, 2019, at a redemption price of $25.00 per share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of our investment in the Farmer Mac Series B non-cumulative preferred stock was $25 million as of the redemption date, which equaled the per share redemption price.

Our investment portfolio is unencumbered and structured so that the securities generally have active secondary or resale markets under normal market conditions. The objective of the portfolio is to achieve returns commensurate with the level of

41



risk assumed subject to CFC’s investment policy and guidelines and liquidity requirements. While we have structured our investment portfolio to remain adequately liquid to serve as a contingent supplemental source of liquidity for unanticipated liquidity needs, we have the positive intent and ability to hold to maturity investment securities classified as held to maturity. As such, we have classified them as held to maturity on our condensed consolidated balance sheets. Our held-to-maturity investment securities totaled $574 million and $565 million as of November 30, 2019 and May 31, 2019, respectively. The average contractual maturity and weighted average coupon of our held-to-maturity investment securities was three years and 2.90%, respectively, as of November 30, 2019.

Pursuant to our investment policy and guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s or BBB- or higher by S&P or BBB- or higher by Fitch, are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities. We have the positive intent and ability to hold these securities to maturity.

We provide additional information on our investment securities in “Note 3—Investment Securities.”

Projected Near-Term Sources and Uses of Liquidity

As discussed above, our primary sources of liquidity include cash flows from operations, member loan repayments, committed bank revolving lines of credit, committed loan facilities, short-term borrowings and funds from the issuance of long-term and subordinated debt. Our primary uses of liquidity include loan advances to members, principal and interest payments on borrowings, periodic settlement payments related to derivative contracts, and operating expenses.

Table 31 below displays our projected sources and uses of cash from debt and investment activity, by quarter, over the next six quarters through the quarter ending May 31, 2021. Our assumptions also include the following: (i) the estimated issuance of long-term debt, including collateral trust bonds and private placement of term debt, is based on maintaining a matched funding position within our loan portfolio with our bank revolving lines of credit serving as a backup liquidity facility for commercial paper and on maintaining outstanding dealer commercial paper at an amount below $1,250 million; (ii) long-term loan scheduled amortization payments represent the scheduled long-term loan payments for loans outstanding as of November 30, 2019, and our current estimate of long-term loan prepayments, which the amount and timing of are subject to change; (iii) other loan repayments and other loan advances primarily relate to line of credit repayments and advances; (iv) long-term debt maturities reflect scheduled maturities of outstanding term debt for the periods presented; and (v) long-term loan advances reflect our current estimate of member demand for loans, the amount and timing of which are subject to change.

Table 31: Projected Sources and Uses of Liquidity from Debt and Investment Activity(1) 
 
 
Projected Sources of Liquidity
 
Projected Uses of Liquidity
 
 
(Dollars in millions)
 
Long-Term Debt Issuance
 
Anticipated Long-Term
Loan Repayments
(2)
 
Other Loan Repayments(3)
 
Total Projected
Sources of
Liquidity
 
Long-Term Debt Maturities(4)
 
Long-Term
 Loan Advances
 
Other Loan Advances(5)
 
Total Projected
Uses of
Liquidity
 
Other Sources/ (Uses) of Liquidity(6)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3Q FY 2020
 
$
890

 
$
326

 
$
171

 
$
1,387

 
$
650

 
$
391

 
$
225

 
$
1,266

 
$
230

4Q FY 2020
 
190

 
320

 
8

 
518

 
233

 
347

 

 
580

 
(15
)
1Q FY 2021
 
920

 
331

 

 
1,251

 
592

 
325

 

 
917

 
(297
)
2Q FY 2021
 
570

 
335

 

 
905

 
547

 
350

 

 
897

 
(23
)
3Q FY 2021
 
320

 
317

 

 
637

 
335

 
310

 

 
645

 

4Q FY 2021
 
570

 
302

 

 
872

 
576

 
300

 

 
876

 
(49
)
Total
 
$
3,460

 
$
1,931

 
$
179

 
$
5,570

 
$
2,933

 
$
2,023

 
$
225

 
$
5,181

 
$
(154
)
____________________________ 
(1) The dates presented represent the end of each quarterly period through the quarter ending May 31, 2021.
(2) Anticipated long-term loan repayments include scheduled long-term loan amortizations, anticipated cash repayments at repricing date and sales.
(3) Other loan repayments include anticipated short-term loan repayments.
(4) Long-term debt maturities also include medium-term notes with an original maturity of one year or less and expected early redemptions of debt.

42



(5)Other loan advances include anticipated short-term loan advances.
(6) Includes net increase or decrease to dealer commercial paper, member commercial paper and select notes, and purchases and maturity of investments.

As displayed in Table 31, we currently project long-term advances of $1,413 million over the next 12 months, which we anticipate will exceed anticipated loan repayments over the same period of $1,312 million by approximately $101 million. The estimates presented above are developed at a particular point in time based on our expected future business growth and funding. Our actual results and future estimates may vary, perhaps significantly, from the current projections, as a result of changes in market conditions, management actions or other factors.

Credit Ratings

Our funding and liquidity, borrowing capacity, ability to access capital markets and other sources of funds and the cost of these funds are partially dependent on our credit ratings. Rating agencies base their ratings on numerous factors, including liquidity, capital adequacy, industry position, member support, management, asset quality, quality of earnings and the probability of systemic support. Significant changes in these factors could result in different ratings. Table 32 displays our credit ratings as of November 30, 2019. During the current quarter, Moody's, S&P and Fitch affirmed our ratings and outlook. Our credit ratings as of November 30, 2019 are unchanged from May 31, 2019, and as of the date of the filing of this Report.

Table 32: Credit Ratings
 
 
November 30, 2019
 
 
Moody’s
 
S&P
 
Fitch
Long-term issuer credit rating(1)
 
A2
 
A
 
A
Senior secured debt(2)
 
A1
 
A
 
  A+
Senior unsecured debt(3)
 
A2
 
A
 
A
Subordinated debt
 
A3
 
BBB+
 
BBB+
Commercial paper
 
P-1
 
A-1
 
F1
Outlook
 
Stable
 
Stable
 
Stable
___________________________ 
(1) Based on our senior unsecured debt rating.
(2)Applies to our collateral trust bonds.
(3)Applies to our medium-term notes.

In order to access the commercial paper markets at attractive rates, we believe we need to maintain our current commercial paper credit ratings of P-1 by Moody’s, A-1 by S&P and F1 by Fitch. In addition, the notes payable to the Federal Financing Bank and guaranteed by RUS under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. See “Credit Risk—Counterparty Credit Risk—Credit Risk-Related Contingent Features” above for information on credit rating provisions related to our derivative contracts.

Financial Ratios

Our debt-to-equity ratio increased to 22.81 as of November 30, 2019, from 19.80 as of May 31, 2019, due to the combined impact of an increase in debt to fund loan growth, an increase in derivative liabilities and a decrease in equity resulting from our reported net loss of $82 million and the patronage capital retirement of $63 million in September 2019.

Our adjusted debt-to-equity ratio increased to 5.78 as of November 30, 2019, from 5.73 as of May 31, 2019, primarily attributable to an increase in debt outstanding to fund loan growth. We provide a reconciliation of our adjusted debt-to-equity ratio to the most comparable GAAP measure and an explanation of the adjustments below in “Non-GAAP Financial Measures.”


43



Debt Covenants

As part of our short-term and long-term borrowing arrangements, we are subject to various financial and operational covenants. If we fail to maintain specified financial ratios, such failure could constitute a default by CFC of certain debt covenants under our committed bank revolving line of credit agreements and senior debt indentures. We were in compliance with all covenants and conditions under our committed bank revolving line of credit agreements and senior debt indentures as of November 30, 2019.

As discussed above in “Summary of Selected Financial Data,” the financial covenants set forth in our committed bank revolving line of credit agreements and senior debt indentures are based on adjusted financial measures, including adjusted TIER. We provide a reconciliation of adjusted TIER and other non-GAAP measures disclosed in this Report to the most comparable GAAP measures and an explanation of the adjustments below in “Non-GAAP Financial Measures.”
MARKET RISK

Interest rate risk represents our primary source of market risk. Interest rate risk is the risk to current or anticipated earnings or equity arising primarily from movements in interest rates. This risk results from differences between the timing of cash flows on our assets and the liabilities funding those assets. The timing of cash flows of our assets is impacted by re-pricing characteristics, prepayments and contractual maturities. Our interest rate risk exposure is primarily related to the funding of the fixed-rate loan portfolio. We provide a discussion of how we manage interest rate risk in our 2019 Form 10-K under “Item 7. MD&A—Market Risk—Market Risk Management.”

Future of LIBOR

In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the LIBOR index, announced that the FCA intends to stop requesting banks to submit the rates required to calculate LIBOR after 2021. Management has formed a cross-functional LIBOR working group to identify CFC’s exposure, assess the potential risks related to the transition from LIBOR to a new index and develop a strategic transition plan. The LIBOR working group has performed an initial assessment of all of the CFC’s LIBOR dependent contracts and financial instruments and the systems, models and processes that may be impacted. The LIBOR working group will closely monitor and assess developments with respect to the phasing out of LIBOR and provide regular reports to the Chief Financial Officer and the CFC Board of Directors. We discuss the risks related to the uncertainty as to the nature of potential changes or other reforms associated with the transition away from and expected replacement of LIBOR as a benchmark interest rate in in our 2019 Form 10-K under “Item 1A. Risk Factors.”

Matched Funding Objective

Our funding objective is to manage the matched funding of asset and liability repricing terms within a range of adjusted total assets (calculated by excluding derivative assets from total assets) deemed appropriate by the Asset Liability Committee based on the current environment and extended outlook for interest rates. We refer to the difference between fixed-rate loans scheduled for amortization or repricing and the fixed-rate liabilities and equity funding those loans as our interest rate gap. Our primary strategies for managing our interest rate risk include the use of derivatives and limiting the amount of fixed-rate assets that can be funded by variable-rate debt to a specified percentage of adjusted total assets based on market conditions. We provide our members with many options on loans with regard to interest rates, the term for which the selected interest rate is in effect and the ability to convert or prepay the loan. Long-term loans generally have maturities of up to 35 years. Borrowers may select fixed interest rates for periods of one year through the life of the loan. We do not match fund the majority of our fixed-rate loans with a specific debt issuance at the time the loans are advanced. We fund the amount of fixed-rate assets that exceed fixed-rate debt and members’ equity with short-term debt, primarily commercial paper.

Interest Rate Gap Analysis

As part of our asset-liability management, we perform a monthly interest rate gap analysis that provides a comparison between the timing of cash flows, by year, for fixed-rate assets scheduled for amortization and repricing and for fixed-rate liabilities and members’ equity maturing. This gap analysis is a useful tool in measuring, monitoring and mitigating the

44



interest rate risk inherent in the funding of fixed-rate assets with variable-rate debt and also helpful in assessing liquidity risk.

Table 33 displays the scheduled amortization and repricing of fixed-rate assets and outstanding fixed-rate liabilities and equity as of November 30, 2019. We exclude variable-rate loans from our interest rate gap analysis, as we do not consider the interest rate risk on these loans to be significant because they are subject to repricing at least monthly. Loans with variable interest rates accounted for 10% and 11% of our total loan portfolio as of November 30, 2019 and May 31, 2019, respectively. Fixed-rate liabilities include debt issued at a fixed rate, as well as variable-rate debt swapped to a fixed rate using interest rate swaps. Fixed-rate debt swapped to a variable rate using interest rate swaps is excluded from the analysis because it is used to match fund our variable-rate loans. With the exception of members’ subordinated certificates, which are generally issued with extended maturities, and commercial paper, our liabilities have average maturities that closely match the repricing terms (but not the maturities) of our fixed-rate loans.

Table 33: Interest Rate Gap Analysis
(Dollars in millions)
 
Prior to 5/31/20
 
Two Years 6/1/20 to 5/31/22
 
Two Years 6/1/22 to
5/31/24
 
Five Years 6/1/24 to
5/31/29
 
10 Years 6/1/29 to 5/31/39
 
6/1/39 and Thereafter
 
Total
Asset amortization and repricing
 
$
874

 
$
3,399

 
$
2,910

 
$
6,078

 
$
7,657

 
$
3,375

 
$
24,293

Liabilities and members’ equity:
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt (1)(2)
 
$
1,122

 
$
3,820

 
$
2,453

 
$
6,182

 
$
4,911

 
$
1,994

 
$
20,482

Subordinated deferrable debt and subordinated certificates(2)(3)
 
7

 
40

 
416

 
616

 
158

 
815

 
2,052

Members’ equity (4)
 

 
21

 
27

 
110

 
306

 
979

 
1,443

Total liabilities and members’ equity
 
$
1,129

 
$
3,881

 
$
2,896

 
$
6,908

 
$
5,375

 
$
3,788

 
$
23,977

Gap (5)
 
$
(255
)
 
$
(482
)
 
$
14

 
$
(830
)
 
$
2,282

 
$
(413
)
 
$
316

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative gap
 
(255
)
 
(737
)
 
(723
)
 
(1,553
)
 
729

 
316

 
 
Cumulative gap as a % of total assets
 
(0.93
)%
 
(2.67
)%
 
(2.62
)%
 
(5.63
)%
 
2.64
%
 
1.15
%
 
 
Cumulative gap as a % of adjusted total assets(6)
 
(0.93
)
 
(2.68
)
 
(2.63
)
 
(5.64
)
 
2.65

 
1.15

 
 
____________________________ 
(1)Includes long-term fixed-rate debt and the net impact of our interest rate swaps.
(2) The maturity presented for debt is based on the call date.
(3)Represents the amount of subordinated deferrable debt and subordinated certificates allocated to fund fixed-rate assets.
(4)Represents the portion of members’ equity and loan loss allowance allocated to fund fixed-rate assets. See Table 38: Members’ Equity below under “Non-GAAP Financial Measures” for a reconciliation of total CFC equity to members’ equity.
(5)Calculated based on the amount of assets scheduled for amortization and repricing less total liabilities and members’ equity funding those assets.
(6)Adjusted total assets represents total assets reported in our condensed consolidated balance sheets less derivative assets.

When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing exceeds the amount of cash flows related to the fixed-rate debt and equity funding those assets, we refer to the difference, or gap, as “warehousing.” When the amount of the cash flows related to fixed-rate assets scheduled for amortization and repricing is less than the amount of the cash flows related to the fixed-rate debt and equity funding those assets, we refer to the gap as “prefunding.” The amount of the gap is an indication of our interest rate and liquidity risk exposure. Our goal is to maintain an unmatched position related to the cash flows for fixed-rate financial assets within a targeted range of adjusted total assets.

Because the substantial majority of our financial assets are fixed-rate, amortizing loans and these loans are primarily funded with bullet debt and equity, our interest rate gap analysis typically reflects a warehouse position. When we are in a warehouse position, we utilize some short-term borrowings to fund the scheduled amortization and repricing of our financial assets. However, we limit the extent to which we fund our long-term, fixed-rate loans with short-term, variable-rate debt because it exposes us to higher interest rate and liquidity risk.

As indicated above in Table 33, we were in a warehousing position of $316 million as of November 30, 2019, down from a prefunded position of $798 million as of May 31, 2019. The gap of $316 million represented 1.15% of both total assets

45



and adjusted total assets (total assets excluding derivative assets) as of November 30, 2019. As discussed above, we manage this gap within a prescribed range because funding long-term fixed-rate loans with short-term and variable-rate debt may expose us to higher interest rate and liquidity risk.
NON-GAAP FINANCIAL MEASURES

In addition to financial measures determined in accordance with GAAP, management evaluates performance based on certain non-GAAP measures, which we refer to as “adjusted” measures. We provide a discussion of each of these non-GAAP measures in our 2019 Form 10-K under “Item 7. MD&A—Non-GAAP Measures.” Below we provide a reconciliation of our adjusted measures to the most comparable GAAP measures in this section. We believe our non-GAAP adjusted metrics, which are not a substitute for GAAP and may not be consistent with similarly titled non-GAAP measures used by other companies, provide meaningful information and are useful to investors because management uses these metrics to compare operating results across financial reporting periods, for internal budgeting and forecasting purposes, for compensation decisions and for short- and long-term strategic planning decisions. In addition, certain of the financial covenants in our committed bank revolving line of credit agreements and debt indentures are based on our adjusted measures.

Statements of Operations Non-GAAP Adjustments

Table 34 provides a reconciliation of adjusted interest expense, adjusted net interest income and adjusted net income to the comparable GAAP measures for the three and six months ended November 30, 2019 and 2018. The adjusted amounts are used in the calculation of our adjusted net interest yield and adjusted TIER.

Table 34: Adjusted Financial Measures—Income Statement
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Interest expense
 
$
(207,871
)
 
$
(204,166
)
 
$
(421,142
)
 
$
(414,397
)
Include: Derivative cash settlements expense
 
(14,150
)
 
(11,805
)
 
(25,193
)
 
(24,634
)
Adjusted interest expense
 
$
(222,021
)
 
$
(215,971
)
 
$
(446,335
)
 
$
(439,031
)
 
 
 
 
 
 
 
 
 
Net interest income
 
$
79,166

 
$
77,087

 
$
155,910

 
$
145,347

Include: Derivative cash settlements expense
 
(14,150
)
 
(11,805
)
 
(25,193
)
 
(24,634
)
Adjusted net interest income
 
$
65,016

 
$
65,282

 
$
130,717

 
$
120,713

 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
241,600

 
$
119,726

 
$
(82,479
)
 
$
167,704

Exclude: Derivative forward value gains (losses)
 
197,600

 
75,148

 
(187,082
)
 
95,160

Adjusted net income
 
$
44,000

 
$
44,578

 
$
104,603

 
$
72,544


We consider the cost of derivatives to be an inherent cost of funding and hedging our loan portfolio and, therefore, economically similar to the interest expense that we recognize on debt issued for funding. We therefore include derivative cash settlements expense in our adjusted interest expense and exclude the unrealized forward value of derivatives from our adjusted net income.

TIER and Adjusted TIER

Table 35 displays the calculation of our TIER and adjusted TIER for the three and six months ended November 30, 2019 and 2018.





46



Table 35: TIER and Adjusted TIER
 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
 
 
2019
 
2018
 
2019
 
2018
TIER (1)
 
2.16

 
1.59

 
0.80

 
1.40

 
 
 
 
 
 
 
 
 
Adjusted TIER (2)
 
1.20

 
1.21

 
1.23

 
1.17

____________________________ 
(1)TIER is calculated based on our net income (loss) plus interest expense for the period divided by interest expense for the period.
(2)Adjusted TIER is calculated based on adjusted net income (loss) plus adjusted interest expense for the period divided by adjusted interest expense for the period.
 
Debt-to-Equity and Adjusted Debt-to-Equity

Table 36 provides a reconciliation between our total liabilities and total equity and the amounts used to calculate our adjusted debt-to-equity ratio as of November 30, 2019 and May 31, 2019. As indicated in Table 36, subordinated debt is treated in the same manner as equity in calculating our adjusted-debt-to-equity ratio.

Table 36: Adjusted Financial Measures—Balance Sheet
(Dollars in thousands)
 
November 30, 2019

May 31, 2019
Total liabilities
 
$
26,408,707

 
$
25,820,490

Exclude:
 
 
 
 
Derivative liabilities
 
591,027

 
391,724

Debt used to fund loans guaranteed by RUS
 
150,422

 
153,991

Subordinated deferrable debt
 
986,026

 
986,020

Subordinated certificates
 
1,355,052

 
1,357,129

Adjusted total liabilities
 
$
23,326,180

 
$
22,931,626

 
 
 
 
 
Total equity
 
$
1,157,894

 
$
1,303,882

Exclude:
 
 
 
 
Prior fiscal year-end cumulative derivative forward value losses
 
(354,704
)
 
(34,974
)
Current year derivative forward value losses
 
(187,082
)
 
(319,730
)
Accumulated other comprehensive income attributable to derivatives(1)
 
2,345

 
2,571

Include:
 
 
 
 
Subordinated deferrable debt
 
986,026

 
986,020

Subordinated certificates
 
1,355,052

 
1,357,129

Adjusted total equity
 
$
4,038,413

 
$
3,999,164

____________________________ 
(1) Represents AOCI related to derivatives. See “Note 10—Equity” for the components of AOCI.

Table 37 displays the calculations of our debt-to-equity and adjusted debt-to-equity ratios as of November 30, 2019 and May 31, 2019.

Table 37: Debt-to-Equity Ratio
 
 
November 30, 2019
 
May 31, 2019
Debt-to-equity ratio (1)
 
22.81

 
19.80

Adjusted debt-to-equity ratio (2)
 
5.78

 
5.73

____________________________ 
(1) Calculated based on total liabilities as of the end of the period divided by total equity as of the end of the period.

47



(2) Calculated based on adjusted total liabilities as of the end of the period divided by adjusted total equity as of the end of the period.

MembersEquity

Members’ equity represents equity attributable to CFC members. Table 38 provides a reconciliation of members’ equity to total CFC equity as of November 30, 2019 and May 31, 2019.

Table 38: Members’ Equity
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Members’ equity:
 
 
 
 
Total CFC equity
 
$
1,132,609

 
$
1,276,735

Excludes:
 
 
 
 
Accumulated other comprehensive loss
 
(82
)
 
(147
)
Current period-end cumulative derivative forward value losses
 
(535,340
)
 
(348,965
)
Subtotal
 
(535,422
)
 
(349,112
)
Members’ equity
 
$
1,668,031

 
$
1,625,847




48



Item 1.
Financial Statements

 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


49


NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019

2018
Interest income
 
$
287,037

 
$
281,253

 
$
577,052

 
$
559,744

Interest expense
 
(207,871
)
 
(204,166
)
 
(421,142
)
 
(414,397
)
Net interest income
 
79,166

 
77,087

 
155,910

 
145,347

Benefit for loan losses
 
1,045

 
1,788

 
1,015

 
1,897

Net interest income after benefit for loan losses
 
80,211

 
78,875

 
156,925

 
147,244

Non-interest income:
 
 

 
 

 
 

 
 

Fee and other income
 
3,842

 
3,595

 
14,783

 
7,506

Derivative gains (losses)
 
183,450

 
63,343

 
(212,275
)
 
70,526

Unrealized gains (losses) on equity securities
 
(114
)
 
(1,619
)
 
1,506

 
(2,345
)
Total non-interest income
 
187,178

 
65,319

 
(195,986
)
 
75,687

Non-interest expense:
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
(12,728
)
 
(12,392
)
 
(25,670
)
 
(25,074
)
Other general and administrative expenses
 
(12,041
)
 
(11,478
)
 
(24,428
)
 
(22,001
)
Losses on early extinguishment of debt
 
(614
)
 

 
(614
)
 
(7,100
)
Other non-interest (expense) income
 
(315
)
 
(355
)
 
6,864

 
(749
)
Total non-interest expense
 
(25,698
)
 
(24,225
)
 
(43,848
)
 
(54,924
)
Income (loss) before income taxes
 
241,691

 
119,969

 
(82,909
)
 
168,007

Income tax benefit (expense)
 
(91
)
 
(243
)
 
430

 
(303
)
Net income (loss)
 
241,600

 
119,726

 
(82,479
)
 
167,704

Less: Net (income) loss attributable to noncontrolling interests
 
(8
)
 
(466
)
 
1,649

 
(479
)
Net income (loss) attributable to CFC
 
$
241,592

 
$
119,260

 
$
(80,830
)
 
$
167,225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.



50









NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
        CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
$
241,600

 
$
119,726

 
$
(82,479
)
 
$
167,704

Other comprehensive income (loss):
 
 

 
 

 
 

 
 

Unrealized gains on cash flow hedge
 

 
1,035

 

 
1,059

Reclassification of derivative gains to net income
 
(114
)
 
(120
)
 
(226
)
 
(239
)
Defined benefit plan adjustments
 
146

 
131

 
291

 
262

Other comprehensive income
 
32

 
1,046

 
65

 
1,082

Total comprehensive income (loss)
 
241,632

 
120,772

 
(82,414
)
 
168,786

Less: Total comprehensive (income) loss attributable to noncontrolling interests
 
(8
)
 
(466
)
 
1,649

 
(479
)
Total comprehensive income (loss) attributable to CFC
 
$
241,624

 
$
120,306

 
$
(80,765
)
 
$
168,307

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.
 

51






NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
       CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(Dollars in thousands)
 
November 30, 2019

May 31, 2019
Assets:
 
 
 
 
Cash and cash equivalents
 
$
114,033

 
$
177,922

Restricted cash
 
10,638

 
8,282

Total cash, cash equivalents and restricted cash
 
124,671

 
186,204

Investment securities:
 
 
 
 
Equity securities
 
63,809

 
87,533

Debt securities held-to-maturity, at amortized cost
 
573,547

 
565,444

Total investment securities
 
637,356

 
652,977

Loans to members
 
26,438,181

 
25,916,904

Less: Allowance for loan losses
 
(16,520
)
 
(17,535
)
Loans to members, net
 
26,421,661

 
25,899,369

Accrued interest receivable
 
130,950

 
133,605

Other receivables
 
36,265

 
36,712

Fixed assets, net
 
121,931

 
120,627

Derivative assets
 
53,174

 
41,179

Other assets
 
40,593

 
53,699

Total assets
 
$
27,566,601

 
$
27,124,372

 
 
 
 
 
Liabilities:
 


 
 
Accrued interest payable
 
$
148,875

 
$
158,997

Debt outstanding:
 
 
 
 
Short-term borrowings
 
4,789,024

 
3,607,726

Long-term debt
 
18,434,451

 
19,210,793

Subordinated deferrable debt
 
986,026

 
986,020

Members’ subordinated certificates:
 
 

 
 

Membership subordinated certificates
 
630,479

 
630,474

Loan and guarantee subordinated certificates
 
503,403

 
505,485

Member capital securities
 
221,170

 
221,170

Total members’ subordinated certificates
 
1,355,052

 
1,357,129

Total debt outstanding
 
25,564,553

 
25,161,668

Patronage capital retirement payable
 
1,933

 

Deferred income
 
53,947

 
57,989

Derivative liabilities
 
591,027

 
391,724

Other liabilities
 
48,372

 
50,112

Total liabilities
 
26,408,707

 
25,820,490

 
 
 
 
 
Equity:
 
 
 
 
CFC equity:
 
 

 
 

Retained equity
 
1,132,691

 
1,276,882

Accumulated other comprehensive loss
 
(82
)
 
(147
)
Total CFC equity
 
1,132,609

 
1,276,735

Noncontrolling interests
 
25,285

 
27,147

Total equity
 
1,157,894

 
1,303,882

Total liabilities and equity
 
$
27,566,601

 
$
27,124,372

 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

52






NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
 CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)

 
 
Three Months Ended November 30, 2019
(Dollars in thousands)
 
Membership
Fees and
Educational
Fund
 
Patronage
Capital
Allocated
 
Members’
Capital
Reserve
 
Unallocated
Net Income
(Loss)
 
CFC
Retained
Equity
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
CFC
Equity
 
Non-controlling
Interests
 
Total
Equity
Balance as of August 31, 2019
 
$
2,676

 
$
797,756

 
$
759,097

 
$
(668,197
)
 
$
891,332

 
$
(114
)
 
$
891,218

 
$
27,210

 
$
918,428

Net income
 

 

 

 
241,592

 
241,592

 

 
241,592

 
8

 
241,600

Other comprehensive income
 

 

 

 

 

 
32

 
32

 

 
32

Patronage capital retirement
 

 

 

 

 

 

 

 
(1,933
)
 
(1,933
)
Other
 
(233
)
 

 

 

 
(233
)
 

 
(233
)
 

 
(233
)
Balance as of November 30, 2019
 
$
2,443

 
$
797,756

 
$
759,097

 
$
(426,605
)
 
$
1,132,691

 
$
(82
)
 
$
1,132,609

 
$
25,285

 
$
1,157,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended November 30, 2019
Balance as of May 31, 2019
 
$
2,982

 
$
860,578

 
$
759,097

 
$
(345,775
)
 
$
1,276,882

 
$
(147
)
 
$
1,276,735

 
$
27,147

 
$
1,303,882

Net loss
 

 

 

 
(80,830
)
 
(80,830
)
 

 
(80,830
)
 
(1,649
)
 
(82,479
)
Other comprehensive income
 

 

 

 

 

 
65

 
65

 

 
65

Patronage capital retirement
 

 
(62,822
)
 

 

 
(62,822
)
 

 
(62,822
)
 
(1,933
)
 
(64,755
)
Other
 
(539
)
 

 

 

 
(539
)
 

 
(539
)
 
1,720

 
1,181

Balance as of November 30, 2019
 
$
2,443

 
$
797,756

 
$
759,097

 
$
(426,605
)
 
$
1,132,691

 
$
(82
)
 
$
1,132,609

 
$
25,285

 
$
1,157,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2018
(Dollars in thousands)
 
Membership
Fees and
Educational
Fund
 
Patronage
Capital
Allocated
 
Members’
Capital
Reserve
 
Unallocated
Net Income
(Loss)
 
CFC
Retained
Equity
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
CFC
Equity
 
Non-controlling
Interests
 
Total
Equity
Balance as of August 31, 2018
 
$
2,609

 
$
763,986

 
$
687,785

 
$
20,325

 
$
1,474,705

 
$
(214
)
 
$
1,474,491

 
$
32,085

 
$
1,506,576

Net income
 

 

 

 
119,260

 
119,260

 

 
119,260

 
466

 
119,726

Other comprehensive income
 

 

 

 

 

 
1,046

 
1,046

 

 
1,046

Other
 
(209
)
 

 

 

 
(209
)
 

 
(209
)
 
(1
)
 
(210
)
Balance as of November 30, 2018
 
$
2,400

 
$
763,986

 
$
687,785

 
$
139,585

 
$
1,593,756

 
$
832

 
$
1,594,588

 
$
32,550

 
$
1,627,138

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended November 30, 2018
Balance as of May 31, 2018
 
$
2,945

 
$
811,493

 
$
687,785

 
$
(36,434
)
 
$
1,465,789

 
$
8,544

 
$
1,474,333

 
$
31,520

 
$
1,505,853

Cumulative effect from adoption of new accounting standard
 

 

 

 
8,794

 
8,794

 
(8,794
)
 

 

 

Balance as of June 1, 2018
 
2,945

 
811,493

 
687,785

 
(27,640
)
 
1,474,583

 
(250
)
 
1,474,333

 
31,520

 
1,505,853

Net income
 

 

 

 
167,225

 
167,225

 

 
167,225

 
479

 
167,704

Other comprehensive income
 

 

 

 

 

 
1,082

 
1,082

 

 
1,082

Patronage capital retirement
 

 
(47,507
)
 

 

 
(47,507
)
 

 
(47,507
)
 

 
(47,507
)
Other
 
(545
)
 

 

 

 
(545
)
 

 
(545
)
 
551

 
6

Balance as of November 30, 2018
 
$
2,400

 
$
763,986

 
$
687,785

 
$
139,585

 
$
1,593,756

 
$
832

 
$
1,594,588

 
$
32,550

 
$
1,627,138

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

53






NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
(82,479
)
 
$
167,704

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of deferred loan fees
 
(4,704
)
 
(5,201
)
Amortization of debt issuance costs and deferred charges
 
4,677

 
5,596

Amortization of discount on long-term debt
 
5,304

 
5,416

Amortization of issuance costs for bank revolving lines of credit
 
3,034

 
2,813

Depreciation and amortization
 
4,755

 
4,346

Benefit for loan losses
 
(1,015
)
 
(1,897
)
Loss on early extinguishment of debt
 
614

 
7,100

Gain on sale of land
 
(7,713
)
 

Unrealized (gains) losses on equity securities
 
(1,506
)
 
2,345

Derivative forward value (gains) losses
 
187,082

 
(95,160
)
Changes in operating assets and liabilities:
 
 
 
 
Accrued interest receivable
 
2,655

 
(6,547
)
Accrued interest payable
 
(10,122
)
 
(2,645
)
Deferred income
 
1,013

 
796

Other
 
(4,041
)
 
(16,466
)
Net cash provided by operating activities
 
97,554

 
68,200

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Advances on loans, net
 
(521,215
)
 
(115,459
)
Investment in fixed assets
 
(6,217
)
 
(7,403
)
Proceeds from sale of land
 
21,268

 

Net proceeds from time deposits
 

 
100,000

Proceeds from redemption of equity securities
 
25,000

 

Purchases of held-to-maturity debt securities
 
(51,386
)
 
(52,845
)
Proceeds from maturities of held-to-maturity debt securities
 
43,250

 
15,354

Net cash used in investing activities
 
(489,300
)
 
(60,353
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Proceeds from short-term borrowings, net
 
1,129,496

 
341,562

Proceeds from short-term borrowings with original maturity greater than 90 days
 
1,266,609

 
629,350

Repayments of short term-debt with original maturity greater than 90 days
 
(1,214,807
)
 
(666,216
)
Payments for issuance costs for revolving bank lines of credit
 
(976
)
 
(2,342
)
Proceeds from issuance of long-term debt, net of discount and issuance costs
 
160,595

 
1,362,714

Payments for retirement of long-term debt
 
(946,828
)
 
(1,611,437
)
Payments made for early extinguishment of debt
 
(614
)
 
(7,100
)
Payments for issuance costs for subordinated deferrable debt
 
(84
)
 

Proceeds from issuance of members’ subordinated certificates
 
1,427

 
964

Payments for retirement of members’ subordinated certificates
 
(3,504
)
 
(4,279
)
Payments for retirement of patronage capital
 
(61,102
)
 
(46,953
)
Additions (repayments) for membership fees, net
 
1

 
(2
)
Net cash provided by (used in) financing activities
 
330,213

 
(3,739
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
(61,533
)
 
4,108

Beginning cash, cash equivalents and restricted cash
 
186,204

 
238,824

Ending cash, cash equivalents and restricted cash
 
$
124,671

 
$
242,932

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
415,069

 
$
405,249

Cash paid for income taxes
 
18

 
30

 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

54





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

National Rural Utilities Cooperative Finance Corporation (“CFC”) is a member-owned cooperative association incorporated under the laws of the District of Columbia in April 1969. CFC’s principal purpose is to provide its members with financing to supplement the loan programs of the Rural Utilities Service (“RUS”) of the United States Department of Agriculture (“USDA”). CFC makes loans to its rural electric members so they can acquire, construct and operate electric distribution systems, generation and transmission (“power supply”) systems and related facilities. CFC also provides its members with credit enhancements in the form of letters of credit and guarantees of debt obligations. As a cooperative, CFC is owned by and exclusively serves its membership, which consists of not-for-profit entities or subsidiaries or affiliates of not-for-profit entities. CFC is exempt from federal income taxes.

Basis of Presentation and Use of Estimates

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and related disclosures during the period. Management’s most significant estimates and assumptions involve determining the allowance for loan losses and the fair value of financial assets and liabilities. Actual results could differ from these estimates. We believe these financial statements reflect all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for the fair presentation of the results for the interim period. The results of operations for interim periods are not necessarily indicative of results for the entire fiscal year. Certain reclassifications have been made to prior periods to conform to the current presentation.

The accompanying financial statements should be read in conjunction with the audited consolidated financial statements, and related notes thereto, included in CFC’s Annual Report on Form 10-K for the fiscal year ended May 31, 2019 (“2019 Form 10-K”). Refer to “Note 1—Summary of Significant Accounting Policies” in our 2019 Form 10-K for a discussion of our significant accounting policies.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of CFC, variable interest entities (“VIEs”) where CFC is the primary beneficiary and subsidiary entities created and controlled by CFC to hold foreclosed assets. CFC did not have any entities that held foreclosed assets as of November 30, 2019 or May 31, 2019. All intercompany balances and transactions have been eliminated. National Cooperative Services Corporation (“NCSC”) and Rural Telephone Finance Cooperative (“RTFC”) are VIEs that are required to be consolidated by CFC. NCSC is a taxable member-owned cooperative that may provide financing to members of CFC, government or quasi-government entities which own electric utility systems that meet the Rural Electrification Act definition of “rural,” and for-profit and nonprofit entities that are owned, operated or controlled by, or provide significant benefits to certain members of CFC. RTFC is a taxable Subchapter T cooperative association that provides financing for its rural telecommunications members and their affiliates. Unless stated otherwise, references to “we,” “our” or “us” relate to CFC and its consolidated entities.

Restricted Cash

Restricted cash, which consists primarily of member funds held in escrow for certain specifically designed cooperative programs, totaled $11 million and $8 million as of November 30, 2019 and May 31, 2019, respectively.



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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Assets Held for Sale

On March 14, 2018, CFC entered into a purchase and sale agreement (“the agreement”), which was subsequently amended, for the sale of a parcel of land, consisting of approximately 28 acres, located in Loudoun County, Virginia. We designated the property, which had a carrying value of $14 million, as held for sale and reclassified it from fixed assets, net to other assets on our consolidated balance sheet. On July 22, 2019, we closed on the sale of the land and received net proceeds of $22 million, resulting in a gain of $8 million on the sale of this property, which is reported in other non-interest income (expense) on our condensed consolidated statements of operations.

Interest Income

The following table presents interest income, by interest-earning asset category, for the three and six months ended November 30, 2019 and 2018.

 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019

2018
Interest income by interest-earning asset type:
 
 
 
 
 
 
 
 
Long-term fixed-rate loans(1)
 
$
260,714

 
$
253,340

 
$
519,192

 
$
505,141

Long-term variable-rate loans
 
8,131

 
10,066

 
17,887

 
19,447

Line of credit loans
 
12,678

 
11,752

 
28,711

 
23,385

TDR loans(2)
 
212

 
211

 
418

 
429

Other income, net(3)
 
(287
)
 
(251
)
 
(571
)
 
(576
)
Total loans
 
281,448

 
275,118

 
565,637

 
547,826

Cash, time deposits and investment securities
 
5,589

 
6,135

 
11,415

 
11,918

Total interest income
 
$
287,037

 
$
281,253

 
$
577,052

 
$
559,744

____________________________ 
(1)Includes loan conversion fees, which are generally deferred and recognized as interest income using the effective interest method.
(2)Troubled debt restructured (“TDR”) loans.
(3)Consists of late payment fees, commitment fees and net amortization of deferred loan fees and loan origination costs.

Deferred income of $54 million and $58 million as of November 30, 2019 and May 31, 2019, respectively, consists primarily of deferred loan conversion fees totaling $48 million and $52 million, respectively. Deferred loan conversion fees are recognized in interest income using the effective interest method.

Interest Expense

The following table presents interest expense, by debt product type, for the three and six months ended November 30, 2019 and 2018.

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NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Interest expense by debt product type:(1)(2)
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
22,112

 
$
22,619

 
$
44,934

 
$
42,038

Medium-term notes
 
31,440

 
33,816

 
63,516

 
66,226

Collateral trust bonds
 
64,523

 
68,934

 
129,904

 
146,639

Guaranteed Underwriter Program notes payable
 
39,786

 
35,014

 
80,219

 
70,348

Farmer Mac notes payable
 
22,654

 
19,697

 
47,728

 
40,808

Other notes payable
 
230

 
322

 
484

 
644

Subordinated deferrable debt
 
12,884

 
9,417

 
25,766

 
18,834

Subordinated certificates
 
14,242

 
14,347

 
28,591

 
28,860

Total interest expense
 
$
207,871

 
$
204,166

 
$
421,142

 
$
414,397

____________________________ 
(1) Includes amortization of debt discounts and debt issuance costs, which are generally deferred and recognized as interest expense using the effective interest method. Issuance costs related to dealer commercial paper, however, are recognized as interest expense immediately as incurred.
(2) Includes fees related to funding arrangements, such as up-front fees paid to banks participating in our committed bank revolving line of credit agreements. Depending on the nature of the fee, amounts may be deferred and recognized as interest expense ratably over the term of the arrangement or recognized immediately as incurred. 

Recent Accounting Changes and Other Developments

Accounting Standards Adopted in Fiscal Year 2020

Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging—Targeted Improvements to Accounting for Hedging Activities, which expands the types of risk management strategies that qualify for hedge accounting treatment to more closely align the results of hedge accounting with the economics of certain risk management activities and simplifies certain hedge documentation and assessment requirement. It also eliminates the concept of separately recording hedge ineffectiveness and expands disclosure requirements. The guidance is effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year before the effective date. We adopted this guidance on June 1, 2019. Hedge accounting is elective, and we currently apply hedge accounting on a limited basis, specifically when we enter into treasury rate lock agreements. The adoption of this guidance did not have an impact on our consolidated financial statements or cash flows. If we continue to elect not to apply hedge accounting to our interest rate swaps, the guidance will not have an impact on our consolidated financial statements or cash flows.

Receivables—Nonrefundable Fees and Other Cost

In March 2017, the FASB issued ASU 2017-08, Receivables—Nonrefundable Fees and Other Costs, which shortens the amortization period for the premium on certain callable debt securities to the earliest call date rather the maturity date. The guidance is applicable to any individual debt security, purchased at a premium, with an explicit and noncontingent call feature with a fixed price on a preset date. The guidance does not impact the accounting for purchased callable debt securities held at a discount. The guidance is effective for public entities in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this guidance on June 1, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements or cash flows.



57





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Leases

In February 2016, the FASB issued ASU 2016-02, Leases, which provides new guidance that is intended to improve financial reporting about leasing transactions. The new guidance requires the recognition of a right-of use asset and lease liability on the consolidated balance sheet by lessees for those leases classified as operating leases under previous guidance. It also requires new disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. We adopted this guidance on June 1, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements or cash flows.

Accounting Standards Issued But Not Yet Adopted

Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The guidance is effective for public entities for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year before the effective date. The guidance is effective for us beginning June 1, 2020. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements or cash flows.

Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments, which replaces the existing incurred credit loss model and establishes a single credit loss framework based on a current expected credit loss model for financial assets carried at amortized cost, including loans and held-to- maturity debt securities. The current expected loss model requires an entity to estimate credit losses expected over the life of the credit exposure upon initial recognition of that exposure when the financial asset is originated or acquired, which will generally result in earlier recognition of credit losses. The guidance also amends the other-than-temporary model for available-for-sale debt securities by requiring the use of an allowance, rather than directly reducing the carrying value of the security. The new guidance also requires expanded credit quality disclosures. The new guidance is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. This guidance is effective for us on June 1, 2020. While early adoption is permitted, we have decided not to elect that option. We are continuing to evaluate the impact of the guidance on our consolidated financial statements, including assessing and evaluating assumptions and models to estimate losses. Upon adoption of the guidance on June 1, 2020, we will be required to record a cumulative effect adjustment to retained earnings for the impact as of the date of adoption. The impact will depend on our portfolio composition and credit quality at the date of adoption, as well as forecasts at that time.
NOTE 2—VARIABLE INTEREST ENTITIES

NCSC and RTFC meet the definition of a VIE because they do not have sufficient equity investment at risk to finance their activities without financial support. CFC is the primary source of funding for NCSC and the sole source of funding for RTFC. Under the terms of management agreements with each company, CFC manages the business operations of NCSC and RTFC. CFC also unconditionally guarantees full indemnification for any loan losses of NCSC and RTFC pursuant to guarantee agreements with each company. CFC earns management and guarantee fees from its agreements with NCSC and RTFC.

NCSC and RTFC creditors have no recourse against CFC in the event of a default by NCSC and RTFC, unless there is a guarantee agreement under which CFC has guaranteed NCSC or RTFC debt obligations to a third party. The following table

58





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

provides information on incremental consolidated assets and liabilities of VIEs included in CFC’s condensed consolidated financial statements, after intercompany eliminations, as of November 30, 2019 and May 31, 2019.

(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Total loans outstanding
 
$
1,058,603

 
$
1,087,988

Other assets
 
12,805

 
10,963

Total assets
 
$
1,071,408

 
$
1,098,951

 
 
 
 
 
Long-term debt
 
$

 
$
6,000

Other liabilities
 
36,729

 
33,385

Total liabilities
 
$
36,729

 
$
39,385


The following table provides information on CFC’s credit commitments to NCSC and RTFC, and its potential exposure to loss as of November 30, 2019 and May 31, 2019.

(Dollars in thousands)
 
November 30, 2019

May 31, 2019
CFC credit commitments
 
$
5,500,000

 
$
5,500,000

Outstanding commitments:
 
 
 
 
Borrowings payable to CFC(1)
 
1,037,863

 
1,059,629

 Credit enhancements:
 
 
 
 
CFC third-party guarantees
 
12,591

 
10,091

Other credit enhancements
 
8,958

 
14,251

Total credit enhancements(2)
 
21,549

 
24,342

Total outstanding commitments
 
1,059,412

 
1,083,971

CFC available credit commitments
 
$
4,440,588

 
$
4,416,029

____________________________
(1) Borrowings payable to CFC are eliminated in consolidation.
(2) Excludes interest due on these instruments.

CFC loans to NCSC and RTFC are secured by all assets and revenue of NCSC and RTFC. CFC’s maximum potential exposure, including interest due, for the credit enhancements totaled $22 million as of November 30, 2019. The maturities for obligations guaranteed by CFC extend through 2031.
NOTE 3—INVESTMENT SECURITIES

We currently hold investments in equity and debt securities. We record purchases and sales of our investment securities on a trade-date basis. The accounting and measurement framework for investment securities differs depending on the security type and the classification.

Equity Securities

The following table presents the fair value of our equity securities, all of which had readily determinable fair values, as of November 30, 2019 and May 31, 2019.

59





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Equity securities at fair value:
 
 
 
 
Farmer Mac—Series A, B and C non-cumulative preferred stock
 
$
57,873

 
$
82,445

Farmer Mac—class A common stock
 
5,936

 
5,088

Total equity securities at fair value
 
$
63,809

 
$
87,533


We recognized net unrealized losses on our investments in equity securities of less than $1 million during the three months ended November 30, 2019 and net unrealized gains of $2 million during the six months ended November 30, 2019. We recognized net unrealized losses on our investments in equity securities of $2 million during both the three and six months ended November 30, 2018, respectively. These unrealized amounts are reported as a component of non-interest income on our condensed consolidated statements of operations.

On June 12, 2019, Farmer Mac redeemed its Series B non-cumulative preferred stock at a redemption price of $25.00 per share, plus any declared and unpaid dividends through and including the redemption date. The amortized cost of our investment in the Farmer Mac Series B non-cumulative preferred stock was $25 million as of the redemption date, which equaled the per share redemption price.

Debt Securities

We currently classify and account for our investments in debt securities as held to maturity because we have the positive intent and ability to hold these securities to maturity. If we acquire debt securities that we may sell prior to maturity in response to changes in our investment strategy, liquidity needs, credit risk mitigating considerations, market risk profile or for other reasons, we would classify such securities as available for sale. We report debt securities classified as held to maturity on our condensed consolidated balance sheets at amortized cost. Interest income, including amortization of premiums and accretion of discounts, is generally recognized over the contractual life of the securities based on the effective yield method.

Pursuant to our investment policy guidelines, all fixed-income debt securities, at the time of purchase, must be rated at least investment grade and on stable outlook based on external credit ratings from at least two of the leading global credit rating agencies, when available, or the corresponding equivalent, when not available. Securities rated investment grade, that is those rated Baa3 or higher by Moody’s Investors Service (“Moody’s”) or BBB- or higher by S&P or BBB- or higher by Fitch Ratings Inc. (“Fitch”), are generally considered by the rating agencies to be of lower credit risk than non-investment grade securities.


60





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Amortized Cost and Fair Value of Debt Securities

The following tables present the amortized cost and fair value of our debt securities and the corresponding gross unrealized gains and losses, by classification category and major security type, as of November 30, 2019 and May 31, 2019.


November 30, 2019
(Dollars in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value
Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
8,687

 
$
1

 
$

 
$
8,688

Commercial paper
 
4,972

 

 

 
4,972

U.S. treasury and agency debt securities
 
4,566

 
145

 

 
4,711

Corporate debt securities
 
483,791

 
8,620

 
(106
)
 
492,305

Commercial MBS:
 
 
 
 
 
 
 
 
Agency
 
7,235

 
384

 

 
7,619

Non-agency
 
3,327

 
1

 
(2
)
 
3,326

Total commercial MBS
 
10,562

 
385

 
(2
)
 
10,945

U.S. state and municipality debt securities
 
9,604

 
458

 

 
10,062

Foreign government debt securities
 
1,260

 
50

 

 
1,310

Other ABS(1)
 
50,105

 
344

 
(3
)
 
50,446

Total debt securities held-to-maturity
 
$
573,547

 
$
10,003

 
$
(111
)
 
$
583,439




May 31, 2019
(Dollars in thousands)

Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Fair Value
Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
1,000

 
$

 
$

 
$
1,000

Commercial paper
 
12,395

 

 

 
12,395

U.S. agency debt securities
 
3,207

 
108

 

 
3,315

Corporate debt securities
 
478,578

 
4,989

 
(912
)
 
482,655

Commercial MBS:
 
 
 
 
 
 
 
 
Agency
 
7,255

 
291

 

 
7,546

Non-agency
 
3,453

 

 
(7
)
 
3,446

Total commercial MBS
 
10,708

 
291

 
(7
)
 
10,992

U.S. state and municipality debt securities
 
9,608

 
352

 

 
9,960

Foreign government debt securities
 
1,254

 
42

 

 
1,296

Other ABS(1)
 
48,694

 
290

 
(48
)
 
48,936

Total debt securities held-to-maturity
 
$
565,444

 
$
6,072

 
$
(967
)
 
$
570,549

____________________________ 
(1) Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.


61





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Debt Securities in Gross Unrealized Loss Position

An unrealized loss exists when the fair value of an individual security is less than its amortized cost basis. The following table presents the fair value and gross unrealized losses for debt securities in a gross loss position, aggregated by security type, and the length of time the securities have been in a continuous unrealized loss position as of November 30, 2019 and May 31, 2019. The securities are segregated between investments that have been in a continuous unrealized loss position for less than 12 months and 12 months or more based on the point in time that the fair value declined below the amortized cost basis.
 
 
November 30, 2019
 
 
Unrealized Loss Position Less than 12 Months
 
Unrealized Loss Position 12 Months or Longer
 
Total
(Dollars in thousands)
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
29,640

 
$
(36
)
 
$
15,621

 
$
(70
)
 
$
45,261

 
$
(106
)
Commercial MBS, non-agency
 
1,998

 
(2
)
 

 

 
1,998

 
(2
)
Other ABS(1)
 
5,085

 
(3
)
 
467

 

 
5,552

 
(3
)
Total debt securities held-to-maturity
 
$
36,723

 
$
(41
)

$
16,088


$
(70
)

$
52,811


$
(111
)
 
 
May 31, 2019
 
 
Unrealized Loss Position Less than 12 Months
 
Unrealized Loss Position 12 Months or Longer
 
Total
(Dollars in thousands)
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
Debt securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper(2)
 
$
2,688

 
$

 
$

 
$

 
$
2,688

 
$

Corporate debt securities
 
45,999

 
(198
)
 
164,086

 
(714
)
 
210,085

 
(912
)
Commercial MBS, non-agency
 
1,996

 
(4
)
 
1,448

 
(3
)
 
3,444

 
(7
)
Other ABS(1)
 
1,982

 
(4
)
 
13,840

 
(44
)
 
15,822

 
(48
)
Total debt securities held-to-maturity
 
$
52,665

 
$
(206
)
 
$
179,374

 
$
(761
)
 
$
232,039

 
$
(967
)
____________________________ 
(1)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
(2)Unrealized losses on the commercial paper investments are less than $1,000.

Other-Than-Temporary Impairment

We conduct periodic reviews of all securities with unrealized losses to evaluate whether the impairment is other than temporary. The number of individual securities in an unrealized loss position was 65 as of November 30, 2019. We have assessed each security with gross unrealized losses included in the above table for credit impairment. As part of that assessment, we concluded that the unrealized losses are driven by changes in market interest rates rather than by adverse changes in the credit quality of these securities. Based on our assessment, we expect to recover the entire amortized cost basis of these securities, as we do not intend to sell any of the securities and have concluded that it is more likely than not that we will not be required to sell prior to recovery of the amortized cost basis. Accordingly, we currently consider the impairment of these securities to be temporary.



62





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Contractual Maturity and Yield

The following table presents, by major security type, the remaining contractual maturity based on amortized cost and fair value of our held-to-maturity investment securities as of November 30, 2019 and May 31, 2019. Because borrowers may have the right to call or prepay certain obligations, the expected maturities of our investments may differ from the scheduled contractual maturities presented below. 
 
 
November 30, 2019
(Dollars in thousands)
 
Due in 1 Year or Less
 
Due > 1 Year through 5 Years
 
Due > 5 Years through 10 Years
 
Due >10 Years
 
Total
Amortized cost:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
7,687

 
$
1,000

 
$

 
$

 
$
8,687

Commercial paper
 
4,972

 

 

 

 
4,972

U.S. treasury and agency debt securities
 

 
3,214

 
1,352

 

 
4,566

Corporate debt securities
 
72,443

 
400,770

 
10,578

 

 
483,791

Commercial MBS:
 
 
 
 
 
 
 
 
 
 
Agency
 

 
3,864

 
3,371

 

 
7,235

Non-agency
 

 

 

 
3,327

 
3,327

Total commercial MBS
 

 
3,864

 
3,371

 
3,327

 
10,562

U.S. state and municipality debt securities
 

 
9,604

 

 

 
9,604

Foreign government debt securities
 

 
1,260

 

 

 
1,260

Other ABS(1)
 
865

 
48,738

 
502

 

 
50,105

Total
 
$
85,967

 
$
468,450

 
$
15,803

 
$
3,327

 
$
573,547

 
 
 
 
 
 
 
 
 
 
 
Fair value:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$
7,688

 
$
1,000

 
$

 
$

 
$
8,688

Commercial paper
 
4,972

 

 

 

 
4,972

U.S. treasury and agency debt securities
 

 
3,343

 
1,368

 

 
4,711

Corporate debt securities
 
72,539

 
408,850

 
10,916

 

 
492,305

Commercial MBS:
 
 
 
 
 
 
 
 
 
 
Agency
 

 
4,060

 
3,559

 

 
7,619

Non-Agency
 

 

 

 
3,326

 
3,326

Total commercial MBS
 

 
4,060

 
3,559

 
3,326

 
10,945

U.S. state and municipality debt securities
 

 
10,062

 

 

 
10,062

Foreign government debt securities
 

 
1,310

 

 

 
1,310

Other ABS(1)
 
865

 
49,079

 
502

 

 
50,446

Total
 
$
86,064

 
$
477,704

 
$
16,345

 
$
3,326

 
$
583,439

 
 
 
 
 
 
 
 
 
 
 
Weighted average coupon(2)
 
2.41
%
 
2.99
%
 
2.91
%
 
2.59
%
 
2.90
%






63





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
May 31, 2019
(Dollars in thousands)
 
Due in 1 Year or Less
 
Due > 1 Year through 5 Years
 
Due > 5 Years through 10 Years
 
Due >10 Years
 
Total
Amortized cost:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$

 
$
1,000

 
$

 
$

 
$
1,000

Commercial paper
 
12,395

 

 

 

 
12,395

U.S. agency debt securities
 

 
2,678

 
529

 

 
3,207

Corporate debt securities
 
51,923

 
414,788

 
11,867

 

 
478,578

Commercial MBS:
 
 
 
 
 
 
 
 
 
 
Agency
 

 
310

 
6,945

 

 
7,255

Non-agency
 

 

 

 
3,453

 
3,453

Total Commercial MBS
 

 
310

 
6,945

 
3,453

 
10,708

U.S. state and municipality debt securities
 

 
9,608

 

 

 
9,608

Foreign government debt securities
 

 
1,254

 

 

 
1,254

Other ABS(1)
 
510

 
45,730

 
2,454

 

 
48,694

Total
 
$
64,828

 
$
475,368

 
$
21,795

 
$
3,453

 
$
565,444

 
 
 
 
 
 
 
 
 
 
 
Fair value:
 
 
 
 
 
 
 
 
 
 
Certificates of deposit
 
$

 
$
1,000

 
$

 
$

 
$
1,000

Commercial paper
 
12,395

 

 

 

 
12,395

U.S. agency debt securities
 

 
2,769

 
546

 

 
3,315

Corporate debt securities
 
51,818

 
418,606

 
12,231

 

 
482,655

Commercial MBS:
 
 
 
 
 
 
 
 
 
 
Agency
 

 
317

 
7,229

 

 
7,546

Non-agency
 

 

 

 
3,446

 
3,446

Total commercial MBS
 

 
317

 
7,229

 
3,446

 
10,992

U.S. state and municipality debt securities
 

 
9,960

 

 

 
9,960

Foreign government debt securities
 

 
1,296

 

 

 
1,296

Other ABS(1)
 
509

 
45,916

 
2,511

 

 
48,936

Total
 
$
64,722

 
$
479,864

 
$
22,517

 
$
3,446

 
$
570,549

 
 
 
 
 
 
 
 
 
 
 
Weighted average coupon(2)
 
2.08
%
 
3.10
%
 
3.07
%
 
3.26
%
 
2.98
%
____________________________ 
(1)Consists primarily of securities backed by auto lease loans, equipment-backed loans, auto loans and credit card loans.
(2)Calculated based on the weighted average coupon rate, which excludes the impact of amortization of premium and accretion of discount.

The average contractual maturity and weighted average coupon of our held-to-maturity investment securities was three years and 2.90%, respectively, as of November 30, 2019. The average credit rating of these securities, based on the equivalent lowest credit rating by Moody’s, S&P and Fitch was A2, A and A, respectively, as of November 30, 2019.


64





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Realized Gains and Losses

We did not sell any of our debt securities during the three and six months ended November 30, 2019, and therefore have not recorded any realized gains or losses. In connection with Farmer Mac’s early redemption of its Series B non-cumulative preferred stock, we recorded a realized loss on equity securities of $0.2 million for the six months ended November 30, 2019.
NOTE 4—LOANS
        
Loans, which are classified as held for investment, are carried at the outstanding unpaid principal balance net of unamortized loan origination costs. The following table presents the outstanding principal balance of loans to members, including deferred loan origination costs, and unadvanced loan commitments by loan type and member class, as of
November 30, 2019 and May 31, 2019.

 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Loans
Outstanding
 
Unadvanced
Commitments(1)
 
Loans
Outstanding
 
Unadvanced
Commitments(1)
Loan type:
 
 
 
 
 
 
 
 
Long-term loans:
 
 
 
 
 
 
 
 
Fixed rate
 
$
23,861,584

 
$

 
$
23,094,253

 
$

Variable rate
 
930,949

 
5,410,294

 
1,066,880

 
5,448,636

Total long-term loans
 
24,792,533

 
5,410,294

 
24,161,133

 
5,448,636

Lines of credit
 
1,634,346

 
7,915,885

 
1,744,531

 
7,788,922

Total loans outstanding
 
26,426,879

 
13,326,179

 
25,905,664

 
13,237,558

Deferred loan origination costs

11,302




11,240



Loans to members

$
26,438,181


$
13,326,179


$
25,916,904


$
13,237,558

 
 
 
 
 
 
 
 
 
Member class:
 
 
 
 
 
 
 
 
CFC:
 
 
 
 
 
 
 
 
Distribution
 
$
20,682,596

 
$
8,764,486

 
$
20,155,266

 
$
8,773,018

Power supply
 
4,601,783

 
3,531,558

 
4,578,841

 
3,466,680

Statewide and associate
 
83,897

 
177,722

 
83,569

 
165,687

Total CFC
 
25,368,276

 
12,473,766

 
24,817,676

 
12,405,385

NCSC
 
702,279

 
563,865

 
742,888

 
552,840

RTFC
 
356,324

 
288,548

 
345,100

 
279,333

Total loans outstanding
 
26,426,879

 
13,326,179

 
25,905,664

 
13,237,558

Deferred loan origination costs
 
11,302

 

 
11,240

 

Loans to members
 
$
26,438,181

 
$
13,326,179

 
$
25,916,904

 
$
13,237,558

____________________________ 
(1)The interest rate on unadvanced loan commitments is not set until an advance is made; therefore, all long-term unadvanced loan commitments are reported as variable-rate. However, the borrower may select either a fixed or a variable rate when an advance on a commitment is made.


65





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Unadvanced Loan Commitments

Unadvanced loan commitments represent approved and executed loan contracts for which funds have not been advanced to borrowers. The following table summarizes the available balance under unadvanced loan commitments as of November 30, 2019 and the related maturities by fiscal year and thereafter by loan type:
 
 
Available
Balance
 
Notional Maturities of Unadvanced Loan Commitments
(Dollars in thousands)
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
Line of credit loans
 
$
7,915,885


$
437,701


$
4,059,897


$
492,117


$
1,362,948


$
1,168,481


$
394,741

Long-term loans
 
5,410,294


230,642


622,895


1,349,256


1,022,784


1,737,285


447,432

Total
 
$
13,326,179


$
668,343


$
4,682,792


$
1,841,373


$
2,385,732


$
2,905,766


$
842,173


Unadvanced line of credit commitments accounted for 59% of total unadvanced loan commitments as of November 30, 2019, while unadvanced long-term loan commitments accounted for 41% of total unadvanced loan commitments. Unadvanced line of credit commitments are typically revolving facilities for periods not to exceed five years. Unadvanced line of credit commitments generally serve as supplemental back-up liquidity to our borrowers. Historically, borrowers have not drawn the full commitment amount for line of credit facilities, and we have experienced a very low utilization rate on line of credit loan facilities regardless of whether or not we are obligated to fund the facility where a material adverse change exists.

Our unadvanced long-term loan commitments have a five-year draw period under which a borrower may advance funds prior to the expiration of the commitment. We expect that the majority of the long-term unadvanced loan commitments of $5,410 million will be advanced prior to the expiration of the commitment.

Because we historically have experienced a very low utilization rate on line of credit loan facilities, which account for the majority of our total unadvanced loan commitments, we believe the unadvanced loan commitment total of $13,326 million as of November 30, 2019 is not necessarily representative of our future funding cash requirements.

Unadvanced Loan Commitments—Conditional

The substantial majority of our line of credit commitments and all of our unadvanced long-term loan commitments include material adverse change clauses. Unadvanced loan commitments subject to material adverse change clauses totaled $10,256 million and $10,294 million as of November 30, 2019 and May 31, 2019, respectively. Prior to making an advance on these facilities, we confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with loan terms and conditions. In some cases, the borrower’s access to the full amount of the facility is further constrained by the designated purpose, imposition of borrower-specific restrictions or by additional conditions that must be met prior to advancing funds.

Unadvanced Loan Commitments—Unconditional

Unadvanced loan commitments not subject to material adverse change clauses at the time of each advance consisted of unadvanced committed lines of credit totaling $3,070 million and $2,944 million as of November 30, 2019 and May 31, 2019, respectively. As such, we are required to advance amounts on these committed facilities as long as the borrower is in compliance with the terms and conditions of the facility.

The following table summarizes the available balance under unconditional committed lines of credit, and the related maturities by fiscal year and thereafter, as of November 30, 2019.

66





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Available
Balance
 
Notional Maturities of Unconditional Committed Lines of Credit
(Dollars in thousands)
 
 
2020
 
2021
 
2022
 
2023
 
2024
 
Thereafter
Committed lines of credit
 
$3,070,365
 
$18,073
 
$417,498
 
$173,335
 
$1,082,986
 
$897,894
 
$480,579

Loan Sales

We transfer, from time to time, loans to third parties. We sold CFC loans with outstanding balances totaling $60 million, at par for cash, during the six months ended November 30, 2019. We did not have any loan sales during the six months ended November 30, 2018. We recorded immaterial losses upon the sale of these loans, attributable to the unamortized deferred loan origination costs associated with the transferred loans.

Pledging of Loans

We are required to pledge eligible mortgage notes in an amount at least equal to the outstanding balance of our secured debt. The following table summarizes our loans outstanding as collateral pledged to secure our collateral trust bonds, Clean Renewable Energy Bonds, notes payable to Farmer Mac and notes payable under USDA’s Guaranteed Underwriter Program (“Guaranteed Underwriter Program”) and the amount of the corresponding debt outstanding as of November 30, 2019 and May 31, 2019. See “Note 6—Short-Term Borrowings” and “Note 7—Long-Term Debt” for information on our borrowings.

(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Collateral trust bonds:
 
 
 
 
2007 indenture:
 
 
 
 
Distribution system mortgage notes
 
$
8,442,063

 
$
8,775,231

RUS-guaranteed loans qualifying as permitted investments
 
131,560

 
134,678

Total pledged collateral
 
$
8,573,623

 
$
8,909,909

Collateral trust bonds outstanding
 
7,322,711

 
7,622,711

 
 
 
 
 
1994 indenture:
 
 
 
 
Distribution system mortgage notes
 
$
45,702

 
$
47,331

Collateral trust bonds outstanding
 
35,000

 
40,000

 
 
 
 
 
Farmer Mac:
 
 
 
 
Distribution and power supply system mortgage notes
 
$
3,729,692

 
$
3,751,798

Notes payable outstanding
 
3,094,954

 
3,054,914

 
 
 
 
 
Clean Renewable Energy Bonds Series 2009A:
 
 
 
 
Distribution and power supply system mortgage notes
 
$
9,756

 
$
10,349

Cash
 
1,188

 
415

Total pledged collateral
 
$
10,944

 
$
10,764

Notes payable outstanding
 
9,225

 
9,225

 
 
 
 
 
Federal Financing Bank:
 
 
 
 
Distribution and power supply system mortgage notes
 
$
6,090,864

 
$
6,157,218

Notes payable outstanding
 
5,363,798

 
5,410,507


67





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Credit Concentration

Concentrations may exist when there are amounts loaned to borrowers engaged in similar activities or in geographic areas that would cause them to be similarly impacted by economic or other conditions or when there are large exposures to single borrowers. As a tax-exempt, member-owned finance cooperative, CFC’s principal focus is to provide funding to its rural electric utility cooperative members to assist them in acquiring, constructing and operating electric distribution systems, power supply systems and related facilities. We serve electric and telecommunications members throughout the United States, with a total of 898 borrowers located in 49 states as of November 30, 2019. Loans to borrowers in Texas accounted for approximately 15% of total loans outstanding as of both November 30, 2019 and May 31, 2019, representing the largest concentration of outstanding loans to borrowers and the largest number of borrowers in any one state.

Because we lend primarily to our rural electric utility cooperative members, we have a loan portfolio subject to single-industry and single-obligor concentration risks. Loans outstanding to electric utility organizations represented approximately 99% of total loans outstanding as of November 30, 2019, unchanged from May 31, 2019. The remaining loans outstanding in our portfolio were to RTFC members, affiliates and associates in the telecommunications industry. The outstanding loan exposure for our 20 largest borrowers was 22% as of both November 30, 2019 and May 31, 2019. The 20 largest borrowers consisted of 11 distribution systems, eight power supply systems and one NCSC associate as of November 30, 2019. The 20 largest borrowers consisted of 10 distribution systems, nine power supply systems and one NCSC associate as of May 31, 2019. The largest total outstanding exposure to a single borrower or controlled group represented approximately 2% of total loans outstanding as of both November 30, 2019 and May 31, 2019.

As part of our strategy in managing our credit exposure, we entered into a long-term standby purchase commitment agreement with Farmer Mac during fiscal year 2016. Under this agreement, we may designate certain long-term loans to be covered under the commitment, subject to approval by Farmer Mac, and in the event any such loan later goes into payment default for at least 90 days, upon request by us, Farmer Mac must purchase such loan at par value. The aggregate unpaid principal balance of designated and Farmer Mac approved loans was $593 million and $619 million as of November 30, 2019 and May 31, 2019, respectively. Under the agreement, we are required to pay Farmer Mac a monthly fee based on the unpaid principal balance of loans covered under the purchase commitment. No loans had been put to Farmer Mac for purchase, pursuant to this agreement, as of November 30, 2019. Also, we had long-term loans totaling $150 million and $154 million as of November 30, 2019 and May 31, 2019, respectively, guaranteed by RUS.

Credit Quality

Assessing the overall credit quality of our loan portfolio and measuring our credit risk is an ongoing process that involves tracking payment status, charge-offs, troubled debt restructurings, nonperforming and impaired loans, the internal risk ratings of our borrowers and other indicators of credit risk. We monitor and subject each borrower and loan facility in our loan portfolio to an individual risk assessment based on quantitative and qualitative factors. Internal risk ratings and payment status trends are indicators, among others, of the probability of borrower default and level of credit risk in our loan portfolio.

Borrower Risk Ratings

As part of our credit risk management process, we monitor and evaluate each borrower and loan in our loan portfolio and assign internal borrower and loan facility risk ratings based on quantitative and qualitative assessments. Our borrower risk ratings are intended to assess probability of default. Each risk rating is reassessed annually following the receipt of the borrower’s audited financial statements; however, interim risk-rating downgrades or upgrades may occur as a result of significant developments or trends. Our borrower risk ratings are intended to align with banking regulatory agency credit risk rating definitions of pass and criticized classifications, with criticized divided between special mention, substandard and doubtful. Pass ratings reflect relatively low probability of default, while criticized ratings have a higher probability of default. Following is a description of each rating category.

68





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Pass:  Borrowers that are not experiencing difficulty and/or not showing a potential or well-defined credit weakness.
Special Mention:  Borrowers that may be characterized by a potential credit weakness or deteriorating financial condition that is not sufficiently serious to warrant a classification of substandard or doubtful.
Substandard:  Borrowers that display a well-defined credit weakness that may jeopardize the full collection of principal and interest.
Doubtful:  Borrowers that have a well-defined credit weakness or weaknesses that make full collection of principal and interest, on the basis of currently known facts, conditions and collateral values, highly questionable and improbable.

Loans to borrowers in the pass, special mention and substandard categories are generally considered not to be individually impaired and are included in the loan pools for determining the collective reserve component of the allowance for loan losses. Loans to borrowers in the doubtful category are considered to be impaired and are therefore individually assessed for impairment in determining the specific reserve component of the allowance for loan losses.

The following tables present total loans outstanding, by member class and borrower risk rating category, based on the risk ratings as of November 30, 2019 and May 31, 2019. If a parent company provides a guarantee of full repayment of loans of a subsidiary borrower, we group the outstanding loans in the borrower risk rating category of the guarantor parent company instead of the risk rating category of the subsidiary borrower for purposes of estimating the allowance for loan losses. The borrower risk ratings for loans outstanding presented in the tables below are based on this risk rating grouping.
 
 
November 30, 2019
(Dollars in thousands)
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
CFC:
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
20,552,574

 
$
9,563

 
$
120,459

 
$

 
$
20,682,596

Power supply
 
4,554,111

 

 
47,672

 

 
4,601,783

Statewide and associate
 
67,640

 
16,257

 

 

 
83,897

CFC total
 
25,174,325

 
25,820

 
168,131

 

 
25,368,276

NCSC
 
702,279

 

 

 

 
702,279

RTFC
 
350,982

 

 
5,342

 

 
356,324

Total loans outstanding
 
$
26,227,586

 
$
25,820

 
$
173,473

 
$

 
$
26,426,879


 
 
May 31, 2019
(Dollars in thousands)
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
CFC:
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
20,022,193

 
$
10,375

 
$
122,698

 
$

 
$
20,155,266

Power supply
 
4,530,708

 

 
48,133

 

 
4,578,841

Statewide and associate
 
68,569

 
15,000

 

 

 
83,569

CFC total
 
24,621,470

 
25,375

 
170,831

 

 
24,817,676

NCSC
 
742,888

 

 

 

 
742,888

RTFC
 
339,508

 

 
5,592

 

 
345,100

Total loans outstanding
 
$
25,703,866

 
$
25,375

 
$
176,423

 
$

 
$
25,905,664


The substantial majority of the loans in the substandard category are attributable to loans to one electric distribution cooperative borrower and its subsidiary totaling $168 million and $171 million as of November 30, 2019 and May 31, 2019, respectively. The electric distribution cooperative owns and operates a distribution and transmission system. Several years

69





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

ago, it established a subsidiary to deploy retail broadband service in underserved rural communities. Although the borrower has experienced financial difficulties due to recent net losses and liquidity constraints, the borrower and its subsidiary are current with regard to all principal and interest payments and have never been delinquent. The borrower, which operates in a territory that is not rate-regulated, recently increased its electric and broadband rates and has begun taking other actions to improve its financial performance and liquidity. All of the loans outstanding to this borrower were secured under our typical collateral requirements for long-term loan advances as of November 30, 2019. We currently expect to collect all principal and interest amounts due from the borrower and its subsidiary. Accordingly, the loans outstanding to this borrower and its subsidiary were not deemed to be impaired as of November 30, 2019.

Payment Status of Loans

The following tables present the payment status of loans outstanding by member class as of November 30, 2019 and May 31, 2019. As indicated in the table, we did not have any past due loans as of either November 30, 2019 or May 31, 2019.
 
 
November 30, 2019
(Dollars in thousands)
 
Current
 
30-89 Days Past Due
 
90 Days or More
Past Due (1)
 
Total
Past Due
 
Total Loans Outstanding
 
Nonaccrual Loans
CFC:
 
 
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
20,682,596

 
$

 
$

 
$

 
$
20,682,596

 
$

Power supply
 
4,601,783

 

 

 

 
4,601,783

 

Statewide and associate
 
83,897

 

 

 

 
83,897

 

CFC total
 
25,368,276

 

 

 

 
25,368,276

 

NCSC
 
702,279

 

 

 

 
702,279

 

RTFC
 
356,324

 

 

 

 
356,324

 

Total loans outstanding
 
$
26,426,879

 
$

 
$

 
$

 
$
26,426,879

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total loans
 
100.00
%
 
%
 
%
 
%
 
100.00
%
 
%

 
 
May 31, 2019
(Dollars in thousands)
 
Current
 
30-89 Days Past Due
 
90 Days or More
Past Due (1)
 
Total
Past Due
 
Total Loans Outstanding
 
Nonaccrual Loans
CFC:
 
 
 
 
 
 
 
 
 
 
 
 
Distribution
 
$
20,155,266

 
$

 
$

 
$

 
$
20,155,266

 
$

Power supply
 
4,578,841

 

 

 

 
4,578,841

 

Statewide and associate
 
83,569

 

 

 

 
83,569

 

CFC total
 
24,817,676

 

 

 

 
24,817,676

 

NCSC
 
742,888

 

 

 

 
742,888

 

RTFC
 
345,100

 

 

 

 
345,100

 

Total loans outstanding
 
$
25,905,664

 
$

 
$

 
$

 
$
25,905,664

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total loans
 
100.00
%
 
%
 
%
 
%
 
100.00
%
 
%
____________________________ 
(1) All loans 90 days or more past due are on nonaccrual status.




70





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Troubled Debt Restructurings

We did not have any loans modified as TDRs during the six months ended November 30, 2019. The following table provides a summary of loans modified as TDRs in prior periods, the performance status of these loans and the unadvanced loan commitments related to the TDR loans, by member class, as of November 30, 2019 and May 31, 2019.
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Loans
Outstanding
 
% of Total Loans
 
Unadvanced
Commitments
 
Loans
Outstanding
 
% of Total Loans
 
Unadvanced
Commitments
TDR loans:
 
 
 
 
 
 
 
 
 
 
 
 
Performing TDR loans:
 
 
 
 
 
 
 
 
 
 
 
 
CFC/Distribution
 
$
5,755

 
0.02
%
 
$

 
$
6,261

 
0.03
%
 
$

RTFC
 
5,342

 
0.02

 

 
5,592

 
0.02

 

Total performing TDR loans
 
11,097

 
0.04

 

 
11,853

 
0.05

 

Total TDR loans
 
$
11,097

 
0.04
%
 
$

 
$
11,853

 
0.05
%
 
$


We did not have any TDR loans classified as nonperforming as of November 30, 2019 or May 31, 2019. TDR loans classified as performing as of November 30, 2019 and May 31, 2019 were performing in accordance with the terms of their respective restructured loan agreement and on accrual status as of the respective reported dates. One borrower with a TDR loan also had two line of credit facilities as of both November 30, 2019 and May 31, 2019. One line of credit facility for $6 million as of both November 30, 2019 and May 31, 2019, is restricted for fuel purchases only. Outstanding loans under this facility totaled $2 million and $3 million as of November 30, 2019 and May 31, 2019, respectively, and were classified as performing as of each respective date. The other line of credit facility for $2 million as of both November 30, 2019 and May 31, 2019, provides bridge funding for electric work plan expenditures in anticipation of receiving RUS funding. Outstanding loans under this facility totaled $2 million and $1 million as of November 30, 2019 and May 31, 2019, respectively, and were classified as performing.

Nonperforming Loans

In addition to TDR loans that may be classified as nonperforming, we also may have nonperforming loans that have not been modified as a TDR. We did not have any loans classified as nonperforming as of either November 30, 2019 or May 31, 2019.

We had no foregone interest income for loans on nonaccrual status during the three and six months ended November 30, 2019 and 2018.


71





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Impaired Loans

The following table provides information on loans classified as individually impaired as of November 30, 2019 and May 31, 2019.
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Recorded
Investment
 
Related
Allowance
 
Recorded
Investment
 
Related
Allowance
With no specific allowance recorded:
 
 
 
 
 
 
 
 
CFC
 
$
5,755

 
$

 
$
6,261

 
$

 
 
 
 
 
 
 
 
 
With a specific allowance recorded:
 
 
 
 
 
 
 
 
RTFC
 
5,342

 
956

 
5,592

 
1,021

Total impaired loans
 
$
11,097

 
$
956

 
$
11,853

 
$
1,021


The following table presents, by company, the average recorded investment for individually impaired loans and the interest income recognized on these loans for the three and six months ended November 30, 2019 and 2018.
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in thousands)
 
Average Recorded Investment 
 
Interest Income Recognized 
CFC
 
$
5,755

 
$
6,261

 
$
144

 
$
137

RTFC
 
5,424

 
5,923

 
68

 
74

Total impaired loans
 
$
11,179

 
$
12,184

 
$
212

 
$
211

 
 
Six Months Ended November 30,
 
 
2019
 
2018
 
2019
 
2018
(Dollars in thousands)
 
Average Recorded Investment 
 
Interest Income Recognized 
CFC
 
$
5,999

 
$
6,383

 
$
281

 
$
279

RTFC
 
5,485

 
5,986

 
137

 
150

Total impaired loans
 
$
11,484

 
$
12,369

 
$
418

 
$
429


Net Charge-Offs

Charge-offs represent the amount of a loan that has been removed from our consolidated balance sheet when the loan is deemed uncollectible. Generally the amount of a charge-off is the recorded investment in excess of the fair value of the expected cash flows from the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral securing the loan. We report charge-offs net of amounts recovered on previously charged off loans. We had no loan defaults or charge-offs during the three and six months ended November 30, 2019 and 2018.

72





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 5—ALLOWANCE FOR LOAN LOSSES

We maintain an allowance for loan losses that represents management’s estimate of probable losses inherent in our loan portfolio as of each balance sheet date. Our allowance for loan losses consists of a collective allowance for loans in our portfolio that are not individually impaired and a specific allowance for loans identified as individually impaired. The allowance for loan losses is reported separately on the consolidated balance sheet, and the provision for loan losses is separately reported on our condensed consolidated statements of operations.

The following tables summarize changes, by company, in the allowance for loan losses as of and for the three and six months ended November 30, 2019 and 2018.
 
 
Three Months Ended November 30, 2019
(Dollars in thousands)
 
CFC
 
NCSC
 
RTFC
 
Total
Balance as of August 31, 2019
 
$
12,962

 
$
2,077

 
$
2,526

 
$
17,565

Provision (benefit) for loan losses
 
114

 
(1,267
)
 
108

 
(1,045
)
Balance as of November 30, 2019
 
$
13,076

 
$
810

 
$
2,634

 
$
16,520

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2018
(Dollars in thousands)
 
CFC
 
NCSC
 
RTFC
 
Total
Balance as of August 31, 2018
 
$
12,508

 
$
2,012

 
$
4,172

 
$
18,692

Benefit for loan losses
 
(334
)
 
(43
)
 
(1,411
)
 
(1,788
)
Balance as of November 30, 2018
 
$
12,174

 
$
1,969

 
$
2,761

 
$
16,904

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended November 30, 2019
(Dollars in thousands)
 
CFC
 
NCSC
 
RTFC
 
Total
Balance as of May 31, 2019
 
$
13,120

 
$
2,007

 
$
2,408

 
$
17,535

Provision (benefit) for loan losses
 
(44
)
 
(1,197
)
 
226

 
(1,015
)
Balance as of November 30, 2019
 
$
13,076

 
$
810

 
$
2,634

 
$
16,520

 
 
Six Months Ended November 30, 2018
(Dollars in thousands)
 
CFC
 
NCSC
 
RTFC
 
Total
Balance as of May 31, 2018
 
$
12,300

 
$
2,082

 
$
4,419

 
$
18,801

Benefit for loan losses
 
(126
)
 
(113
)
 
(1,658
)
 
(1,897
)
Balance as of November 30, 2018
 
$
12,174

 
$
1,969

 
$
2,761

 
$
16,904


The following tables present, by company, the components of our allowance for loan losses and the recorded investment of the related loans as of November 30, 2019 and May 31, 2019.

73





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
November 30, 2019
(Dollars in thousands)
 
CFC
 
NCSC
 
RTFC
 
Total
Ending balance of the allowance:
 
 
 
 
 
 
 
 
Collective allowance
 
$
13,076

 
$
810

 
$
1,678

 
$
15,564

Specific allowance
 

 

 
956

 
956

Total ending balance of the allowance
 
$
13,076

 
$
810

 
$
2,634

 
$
16,520

 
 
 
 
 
 
 
 
 
Recorded investment in loans:
 
 
 
 
 
 
 
 
Collectively evaluated loans
 
$
25,362,521

 
$
702,279

 
$
350,982

 
$
26,415,782

Individually evaluated loans
 
5,755

 

 
5,342

 
11,097

Total recorded investment in loans
 
$
25,368,276

 
$
702,279

 
$
356,324

 
$
26,426,879

 
 
 
 
 
 
 
 
 
Total recorded investment in loans, net(1)
 
$
25,355,200

 
$
701,469

 
$
353,690

 
$
26,410,359

 
 
 
 
 
 
 
 
 
Allowance coverage ratio:
 
 
 
 
 
 
 
 
Allowance as a percentage of total recorded investment in loans
 
0.05
%
 
0.12
%
 
0.74
%
 
0.06
%

 
 
May 31, 2019
(Dollars in thousands)
 
CFC
 
NCSC
 
RTFC
 
Total
Ending balance of the allowance:
 
 
 
 
 
 
 
 
Collective allowance
 
$
13,120

 
$
2,007

 
$
1,387

 
$
16,514

Specific allowance
 

 

 
1,021

 
1,021

Total ending balance of the allowance
 
$
13,120

 
$
2,007

 
$
2,408

 
$
17,535

 
 
 
 
 
 
 
 
 
Recorded investment in loans:
 
 
 
 
 
 
 
 
Collectively evaluated loans
 
$
24,811,415

 
$
742,888

 
$
339,508

 
$
25,893,811

Individually evaluated loans
 
6,261

 

 
5,592

 
11,853

Total recorded investment in loans
 
$
24,817,676

 
$
742,888

 
$
345,100

 
$
25,905,664

 
 
 
 
 
 
 
 
 
Total recorded investment in loans, net(1)
 
$
24,804,556

 
$
740,881

 
$
342,692

 
$
25,888,129

 
 
 
 
 
 
 
 
 
Allowance coverage ratio:
 
 
 
 
 
 
 
 
Allowance as a percentage of total recorded investment in loans
 
0.05
%
 
0.27
%
 
0.70
%
 
0.07
%
____________________________ 
(1)Excludes unamortized deferred loan origination costs of $11 million as of both November 30, 2019 and May 31, 2019.

As noted above in “Note 4—Loans,” we did not have any loans classified as nonperforming as of either November 30, 2019 or May 31, 2019.

In addition to the allowance for loan losses, we also maintain a reserve for unadvanced loan commitments at a level estimated by management to provide for probable losses under these commitments as of each balance sheet date, which was less than $1 million as of both November 30, 2019 and May 31, 2019.

74





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 6—SHORT-TERM BORROWINGS

Short-term borrowings consist of borrowings with an original contractual maturity of one year or less and do not include the current portion of long-term debt. Our short-term borrowings totaled $4,789 million and accounted for 19% of total debt outstanding as of November 30, 2019, compared with $3,608 million, or 14%, of total debt outstanding as of May 31, 2019. The following table provides comparative information on our short-term borrowings as of November 30, 2019 and May 31, 2019.

(Dollars in thousands)
 
November 30, 2019

May 31, 2019
Short-term borrowings:
 
 
 
 
Commercial paper:
 
 
 
 
Commercial paper sold through dealers, net of discounts
 
$
1,038,862

 
$
944,616

Commercial paper sold directly to members, at par
 
1,371,902

 
1,111,795

Total commercial paper
 
2,410,764

 
2,056,411

Select notes to members
 
1,470,579

 
1,023,952

Daily liquidity fund notes to members
 
508,169

 
298,817

Medium-term notes to members
 
249,512

 
228,546

Farmer Mac revolving facility(1)
 
150,000

 

Total short-term borrowings
 
$
4,789,024

 
$
3,607,726

____________________________ 
(1)Advanced under the revolving note purchase agreement with Farmer Mac dated July 31, 2015. See “Note 7—Long-Term Debt” for additional information on this revolving note purchase agreement with Farmer Mac.

Committed Bank Revolving Line of Credit Agreements

We had $2,725 million and $2,975 million of commitments under committed bank revolving line of credit agreements as of November 30, 2019 and May 31, 2019, respectively. Under our current committed bank revolving line of credit agreements, we have the ability to request up to $300 million of letters of credit, which would result in a reduction in the remaining available amount under the facilities.

On November 26, 2019, we amended the three-year and five-year committed bank revolving line of credit agreements to extend the maturity date of the three-year agreement to November 28, 2022, and to terminate certain bank commitments totaling $125 million under the three-year agreement and $125 million under the five-year agreement. As a result, the total commitment amount from third-parties under the three-year facility and the five-year facility is $1,315 million and $1,410 million, respectively, resulting in a combined total commitment amount under the two facilities of $2,725 million.

The following table presents the total commitment, the net amount available for use and the outstanding letters of credit under our committed bank revolving line of credit agreements as of November 30, 2019 and May 31, 2019.

75





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
November 30, 2019

May 31, 2019

 

 
(Dollars in millions)
 
Total Commitment

Letters of Credit Outstanding

Net Available for Use

Total Commitment

Letters of Credit Outstanding

Net Available for Use

Maturity

Annual Facility Fee (1)
3-year agreement
 
$

 
$

 
$

 
$
1,440

 
$

 
$
1,440

 
November 28, 2021
 
7.5 bps
3-year agreement
 
1,315

 

 
1,315

 

 

 

 
November 28, 2022
 
7.5 bps
Total 3-year agreement
 
1,315

 

 
1,315

 
1,440

 

 
1,440

 
 
 
 
5-year agreement
 
1,410

 
3

 
1,407

 
1,535

 
3

 
1,532

 
November 28, 2023
 
10 bps
Total
 
$
2,725

 
$
3

 
$
2,722

 
$
2,975

 
$
3

 
$
2,972

 
 
 
 
____________________________ 
(1) Facility fee determined by CFC’s senior unsecured credit ratings based on the pricing schedules put in place at the inception of the related agreement.

We had no borrowings outstanding under our committed bank revolving line of credit agreements as of November 30, 2019 or May 31, 2019, and we were in compliance with all covenants and conditions under the agreements as of each date.

76





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 7—LONG-TERM DEBT

The following table displays long-term debt outstanding, by debt type, as of November 30, 2019 and May 31, 2019.
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Secured long-term debt:
 
 

 
 

Collateral trust bonds
 
$
7,357,711

 
$
7,662,711

Unamortized discount
 
(239,551
)
 
(244,643
)
Debt issuance costs
 
(31,575
)
 
(34,336
)
Total collateral trust bonds
 
7,086,585

 
7,383,732

Guaranteed Underwriter Program notes payable
 
5,363,798

 
5,410,507

Farmer Mac notes payable
 
2,944,954

 
3,054,914

Other secured notes payable
 
9,225

 
9,225

Debt issuance costs
 
(146
)
 
(178
)
Total other secured notes payable
 
9,079

 
9,047

Total secured notes payable
 
8,317,831

 
8,474,468

Total secured long-term debt
 
15,404,416

 
15,858,200

Unsecured long-term debt:
 
 
 
 
Medium-term notes sold through dealers
 
2,617,353

 
2,962,375

Medium-term notes sold to members
 
423,539

 
397,080

Subtotal medium-term notes
 
3,040,892

 
3,359,455

Unamortized discount
 
(764
)
 
(931
)
Debt issuance costs
 
(17,617
)
 
(19,399
)
Total unsecured medium-term notes
 
3,022,511

 
3,339,125

Unsecured notes payable
 
7,701

 
13,701

Unamortized discount
 
(142
)
 
(187
)
Debt issuance costs
 
(35
)
 
(46
)
Total unsecured notes payable
 
7,524

 
13,468

Total unsecured long-term debt
 
3,030,035

 
3,352,593

Total long-term debt
 
$
18,434,451

 
$
19,210,793


Collateral Trust Bonds

Collateral trust bonds represent secured obligations sold to investors in the capital markets. Collateral trust bonds are secured by the pledge of mortgage notes or eligible securities in an amount at least equal to the principal balance of the bonds outstanding.

On October 15, 2019, we redeemed the $300 million outstanding principal amount of our 2.30% collateral trust bonds due November 15, 2019 at par.

On November 27, 2019, we provided notice to investors of our intent to redeem all $400 million outstanding principal amount of our 2.00% collateral trust bonds due January 27, 2020 on December 27, 2019. We redeemed these outstanding collateral trust bonds at par on December 27, 2019.


77





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Secured Notes Payable

We had outstanding secured notes payable totaling $5,364 million and $5,411 million as of November 30, 2019 and May 31, 2019, respectively, under bond purchase agreements with the Federal Financing Bank and a bond guarantee agreement with RUS issued under the Guaranteed Underwriter Program, which provides guarantees to the Federal Financing Bank. We pay RUS a fee of 30 basis points per year on the total amount outstanding. We had up to $1,350 million available for access under the Guaranteed Underwriter Program as of November 30, 2019. On September 25, 2019, we received a commitment letter for the guarantee by RUS of a $500 million loan facility from the Federal Financing Bank under the Guaranteed Underwriter Program.

The notes outstanding under the Guaranteed Underwriter Program contain a provision that if during any portion of the fiscal year, our senior secured credit ratings do not have at least two of the following ratings: (i) A3 or higher from Moody’s, (ii) A- or higher from S&P, (iii) A- or higher from Fitch, or (iv) an equivalent rating from a successor rating agency to any of the above rating agencies, we may not make cash patronage capital distributions in excess of 5% of total patronage capital. We are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding under the Guaranteed Underwriter Program. See “Note 4—Loans” for additional information on the collateral pledged to secure notes payable under this program.

We had two revolving note purchase agreements with Farmer Mac as of November 30, 2019, which together allowed us to borrow up to $5,500 million from Farmer Mac. Under the first revolving note purchase agreement, dated March 24, 2011, as amended, we can borrow up to $5,200 million as of November 30, 2019, at any time, subject to market conditions, through January 11, 2022. This date automatically extends on each anniversary date of the closing for an additional year, unless prior to any such anniversary date, Farmer Mac provides us with a notice that the draw period will not be extended beyond the remaining term. Pursuant to this revolving note purchase agreement, we can borrow, repay and re-borrow funds at any time through maturity, as market conditions permit, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. We had outstanding secured notes payable totaling $2,945 million and $3,055 million as of November 30, 2019 and May 31, 2019, respectively, under this Farmer Mac revolving note purchase agreement. The available borrowing amount totaled $2,255 million as of November 30, 2019.

Under our second revolving note purchase agreement with Farmer Mac, dated July 31, 2015, as amended, we could borrow up to $300 million at any time through December 20, 2023 at a fixed spread over London Interbank Offered Rate (“LIBOR”). This agreement also allowed us to borrow, repay and re-borrow funds at any time through maturity, provided that the outstanding principal amount at any time does not exceed the total available under the agreement. Under this revolving note purchase agreement, we had outstanding secured notes payable totaling $150 million and an available borrowing amount of $150 million as of November 30, 2019. We had no notes payable outstanding under this agreement as of May 31, 2019. On November 14, 2019, we provided notice to Farmer Mac of termination of the $300 million revolving note purchase agreement, effective December 20, 2019. We repaid the outstanding secured notes payable of $150 million on December 4, 2019, prior to termination of the agreement.

Under the terms of the first Farmer Mac revolving note purchase agreement of $5,200 million discussed above, the commitment amount increases by $300 million in the event of termination of the second revolving note purchase agreement of $300 million. As a result of the termination of the second revolving note purchase agreement, the commitment amount under the $5,200 million revolving note purchase agreement increased to $5,500 million, effective December 20, 2019.

Pursuant to both Farmer Mac revolving note purchase agreements, we are required to pledge eligible distribution system or power supply system loans as collateral in an amount at least equal to the total principal amount of notes outstanding. See “Note 4—Loans” for additional information on pledged collateral.


78





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Unsecured Notes Payable

On November 15, 2019, we redeemed the $6 million outstanding principal amount of our 9.07% notes payable due May 15, 2022, at a premium of less than $1 million.

We were in compliance with all covenants and conditions under our senior debt indentures as of November 30, 2019 and May 31, 2019.
NOTE 8—SUBORDINATED DEFERRABLE DEBT

The following table presents subordinated deferrable debt outstanding as of November 30, 2019 and May 31, 2019. See “Note 8—Subordinated Deferrable Debt” of our 2019 Form 10-K for additional information on the terms of our subordinated deferrable debt outstanding.
(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
4.75% due 2043 with a call date of April 30, 2023
 
$
400,000

 
$
400,000

5.25% due 2046 with a call date of April 20, 2026
 
350,000

 
350,000

5.50% due 2064 with a call date of May 15, 2024
 
250,000

 
250,000

Debt issuance costs
 
(13,974
)
 
(13,980
)
Total subordinated deferrable debt
 
$
986,026

 
$
986,020

NOTE 9—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and Treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as OTC derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.

Accounting for Derivatives

In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair value as either a derivative asset or derivative liability on our condensed consolidated balance sheets. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. Our derivatives transactions are not collateralized and do not include collateralization agreements with counterparties. Derivatives in a gain position are reported as derivative assets on our condensed consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued interest related to derivatives is reported on our condensed consolidated balance sheets as a component of either accrued interest receivable or accrued interest payable.

If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of net accrued periodic derivative cash settlements expense and derivative forward value amounts, are recognized in our condensed consolidated statements of operations under derivative gains (losses). If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of derivatives designated as qualifying fair value hedges are recognized in the same line item on our condensed consolidated statements of operations as the earnings effect of the related hedged item. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of AOCI. Those amounts are reclassified

79





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

into earnings in the same period during which the forecasted transaction impacts earnings and presented in the same line item on our condensed consolidated statements of operations as the earnings effect of the related hedged item.

We generally do not designate interest rate swaps, which represented all of our outstanding derivatives as of November 30, 2019, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our condensed consolidated statements of operations under derivative gains (losses). Net periodic cash settlements expense related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.

Outstanding Notional Amount of Derivatives Not Designated as Accounting Hedges

The notional amount provides an indication of the volume of our derivatives activity, but this amount is not recorded on our condensed consolidated balance sheets. The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged. The following table shows the outstanding notional amounts and the weighted-average rate paid and received for our interest rate swaps, by type, as of November 30, 2019 and May 31, 2019. The substantial majority of our interest rate swaps use an index based on LIBOR for either the pay or receive leg of the swap agreement.
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Notional
   Amount
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
 
Notional
Amount
 
Weighted-
Average
Rate Paid
 
Weighted-
Average
Rate Received
Pay-fixed swaps
 
$
7,271,741

 
2.84
%
 
2.00
%
 
$
7,379,280

 
2.83
%
 
2.60
%
Receive-fixed swaps
 
3,099,000

 
2.66

 
2.66

 
3,399,000

 
3.25

 
2.56

Total interest rate swaps
 
10,370,741

 
2.78

 
2.20

 
10,778,280

 
2.97

 
2.58

Forward pay-fixed swaps
 
65,000

 
 
 
 
 
65,000

 
 
 
 
Total
 
$
10,435,741

 
 
 
 
 
$
10,843,280

 
 
 
 

Impact of Derivatives on Condensed Consolidated Balance Sheets

The following table displays the fair value of the derivative assets and derivative liabilities recorded on our condensed consolidated balance sheets and the related outstanding notional amount of our interest rate swaps by derivatives type, as of November 30, 2019 and May 31, 2019.
 
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Fair Value
 
Notional Balance
 
Fair Value
 
Notional Balance
Derivative assets:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
53,174

 
$
2,335,476

 
$
41,179

 
$
2,332,104

 
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
591,027

 
$
8,100,265

 
$
391,724

 
$
8,511,176


All of our master swap agreements include netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties. However, as indicated above, we report derivative asset and liability amounts on a gross basis by individual contracts. The following table presents the gross fair value of derivative assets and liabilities reported on our condensed consolidated balance sheets as of November 30, 2019 and May 31, 2019, and provides information on the impact of netting provisions and collateral pledged, if any.


80





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
November 30, 2019
 
 
Gross Amount
of Recognized
Assets/ Liabilities
 
Gross Amount
Offset in the
Balance Sheet
 
Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet
 
Gross Amount
Not Offset in the
Balance Sheet
 
 
(Dollars in thousands)
 
 
 
 
Financial
Instruments
 
Cash
Collateral
Pledged
 
Net
Amount
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
53,174

 
$

 
$
53,174

 
$
53,174

 
$

 
$

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
591,027

 

 
591,027

 
53,174

 

 
537,853


 
 
May 31, 2019
 
 
Gross Amount
of Recognized
Assets/ Liabilities
 
Gross Amount
Offset in the
Balance Sheet
 
Net Amount of Assets/ Liabilities
Presented
in the
Balance Sheet
 
Gross Amount
Not Offset in the
Balance Sheet
 
 
(Dollars in thousands)
 
 
 
 
Financial
Instruments
 
Cash
Collateral
Pledged
 
Net
Amount
Derivative assets:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
41,179

 
$

 
$
41,179

 
$
41,176

 
$

 
$
3

Derivative liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
391,724

 

 
391,724

 
41,176

 

 
350,548


Impact of Derivatives on Condensed Consolidated Statements of Operations

Derivative gains (losses) reported in our condensed consolidated statements of operations consist of derivative cash settlements expense and derivative forward value gains (losses). Derivative cash settlements expense represents net contractual interest expense accruals on interest rate swaps during the period. The derivative forward value gains (losses) represent the change in fair value of our interest rate swaps during the reporting period due to changes in the estimate of future interest rates over the remaining life of our derivative contracts.

The following table presents the components of the derivative gains (losses) reported in our condensed consolidated statements of operations for our interest rate swaps for the three and six months ended November 30, 2019 and 2018.

 
 
Three Months Ended November 30,
 
Six Months Ended November 30,
(Dollars in thousands)
 
2019
 
2018
 
2019
 
2018
Derivative gains (losses) attributable to:
 
 
 
 
 
 
 
 
Derivative cash settlements expense
 
$
(14,150
)
 
$
(11,805
)
 
$
(25,193
)
 
$
(24,634
)
Derivative forward value gains (losses)
 
197,600

 
75,148

 
(187,082
)
 
95,160

Derivative gains (losses)
 
$
183,450

 
$
63,343

 
$
(212,275
)
 
$
70,526


Credit Risk-Related Contingent Features

Our derivative contracts typically contain mutual early-termination provisions, generally in the form of a credit rating trigger. Under the mutual credit rating trigger provisions, either counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls below a level specified in the agreement. If a

81





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

derivative contract is terminated, the amount to be received or paid by us would be equal to the prevailing fair value, as defined in the agreement, as of the termination date.

Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of November 30, 2019. Both Moody’s and S&P had our ratings on stable outlook as of November 30, 2019. The following table displays the notional amounts of our derivative contracts with rating triggers as of November 30, 2019, and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements for each counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.
(Dollars in thousands)
 
Notional
 Amount
 
Payable Due from CFC
 
Receivable
Due to CFC
 
Net (Payable)/Receivable
Impact of rating downgrade trigger:
 
 
 
 
 
 
 
 
Falls below A3/A-(1)

$
47,955


$
(9,457
)

$


$
(9,457
)
Falls below Baa1/BBB+
 
6,861,619


(346,099
)



(346,099
)
Falls to or below Baa2/BBB (2)
 
479,629


(13,704
)



(13,704
)
Falls below Baa3/BBB-
 
221,078

 
(12,385
)
 

 
(12,385
)
Total
 
$
7,610,281


$
(381,645
)

$


$
(381,645
)
____________________________ 
(1) Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.  
(2) Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.

We have outstanding notional amount of derivatives with one counterparty subject to a ratings trigger and early termination provision in the event of a downgrade of CFC’s senior unsecured credit ratings below Baa3, BBB- or BBB- by Moody’s, S&P or Fitch, respectively, which is not included in the above table, totaling $165 million as of November 30, 2019. These contracts were in an unrealized loss position of $31 million as of November 30, 2019.

Our largest counterparty exposure, based on the outstanding notional amount, accounted for approximately 23% of the total outstanding notional amount of derivatives as of both November 30, 2019 and May 31, 2019. The aggregate fair value amount, including the credit valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $402 million as of November 30, 2019.
NOTE 10—EQUITY

Total equity decreased by $146 million to $1,158 million as of November 30, 2019. The decrease was primarily attributable to our reported net loss of $82 million for the six months ended November 30, 2019 and the patronage capital retirement of $63 million in September 2019.
 
 
 
 
 
In July 2019, the CFC Board of Directors authorized the allocation of the fiscal year 2019 net earnings as follows: $97 million to members in the form of patronage, $71 million to the members’ capital reserve and $1 million to the cooperative educational fund. The amount of patronage capital allocated each year by CFC’s Board of Directors is based on adjusted net income, which excludes the impact of derivative forward value gains (losses). See “MD&A—Non-GAAP Financial Measures” for information on adjusted net income.


82





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In July 2019, the CFC Board of Directors authorized the retirement of allocated net earnings totaling $63 million, consisting of $48 million, which represented 50% of the patronage capital allocation for fiscal year 2019, and $15 million, which represented the portion of the allocation from fiscal year 1994 net earnings that has been held for 25 years pursuant to the CFC Board of Directors policy. This amount was returned to members in cash in September 2019. The remaining portion of the amount allocated for fiscal year 2019 will be retained by CFC for 25 years under current guidelines adopted by the CFC Board of Directors in June 2009.

The CFC Board of Directors is required to make annual allocations of adjusted net income, if any. CFC has made annual retirements of allocated net earnings in 39 of the last 40 fiscal years; however, future retirements of allocated amounts are determined based on CFC’s financial condition. The CFC Board of Directors has the authority to change the current practice for allocating and retiring net earnings at any time, subject to applicable laws. See “Item 1. Business—Allocation and Retirement of Patronage Capital” of our 2019 Form 10-K for additional information.

Accumulated Other Comprehensive Income (Loss)

The following tables summarize, by component, the activity in AOCI as of and for the three and six months ended November 30, 2019 and 2018.
 
 
Three Months Ended November 30, 2019
(Dollars in thousands)
 
Unrealized Gains (Losses)
Equity Securities
 
Unrealized Gains
Derivatives
 
Unrealized Gains (Losses) Cash Flow Hedges
 
Unrealized Losses Defined Benefit Plan
 
Total
Beginning balance
 
$

 
$
2,459

 
$

 
$
(2,573
)
 
$
(114
)
(Gains) losses reclassified into earnings
 

 
(114
)
 

 
146

 
32

Ending balance
 
$

 
$
2,345

 
$

 
$
(2,427
)
 
$
(82
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2018
(Dollars in thousands)
 
Unrealized Gains (Losses)
Equity Securities
 
Unrealized Gains
Derivatives
 
Unrealized Gains (Losses) Cash Flow Hedges
 
Unrealized Losses Defined Benefit Plan
 
Total
Beginning balance
 
$

 
$
2,920

 
$
(1,035
)
 
$
(2,099
)
 
$
(214
)
Unrealized gains
 

 

 
1,035

 

 
1,035

(Gains) losses reclassified into earnings
 

 
(120
)
 

 
131

 
11

Other comprehensive income (loss)
 

 
(120
)
 
1,035

 
131

 
1,046

Ending balance
 
$

 
$
2,800

 
$

 
$
(1,968
)
 
$
832

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended November 30, 2019
(Dollars in thousands)
 
Unrealized Gains (Losses)
Equity Securities
 
Unrealized Gains
Derivatives(1)
 
Unrealized Gains (Losses) Cash Flow Hedges
 
Unrealized Losses Defined Benefit Plan(2)
 
Total
Beginning balance
 
$

 
$
2,571

 
$

 
$
(2,718
)
 
$
(147
)
(Gains) losses reclassified into earnings
 

 
(226
)
 

 
291

 
65

Ending balance
 
$

 
$
2,345

 
$

 
$
(2,427
)
 
$
(82
)

83





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Six Months Ended November 30, 2018
(Dollars in thousands)
 
Unrealized Gains (Losses)
Equity Securities
 
Unrealized Gains
Derivatives(1)
 
Unrealized Gains (Losses) Cash Flow Hedges
 
Unrealized Losses Defined Benefit Plan(2)
 
Total
Beginning balance
 
$
8,794

 
$
3,039

 
$
(1,059
)
 
$
(2,230
)
 
$
8,544

Cumulative effect of changes from adoption of new accounting standard
 
(8,794
)
 

 

 

 
(8,794
)
Unrealized gains
 

 

 
1,059

 

 
1,059

(Gains) losses reclassified into earnings
 

 
(239
)
 

 
262

 
23

Other comprehensive income (loss)
 

 
(239
)
 
1,059

 
262

 
1,082

Ending balance
 
$

 
$
2,800

 
$

 
$
(1,968
)
 
$
832

____________________________ 
(1)Amounts are reclassified into income in the derivative forward value gains (losses) component of the derivative gains (losses) line item of our condensed consolidated statements of operations.
(2)Amounts are reclassified into income in the other general and administrative expenses line item of our condensed consolidated statements of operations.

We expect to reclassify less than $1 million of amounts in AOCI related to unrealized derivative gains into earnings over the next 12 months.
NOTE 11—GUARANTEES

The following table summarizes total guarantees, by type of guarantee and by member class, as of November 30, 2019 and May 31, 2019.

(Dollars in thousands)
 
November 30, 2019
 
May 31, 2019
Total by type:
 
 
 
 
Long-term tax-exempt bonds(1)
 
$
308,750

 
$
312,190

Letters of credit(2)
 
339,241

 
379,001

Other guarantees
 
146,732

 
146,244

Total
 
$
794,723

 
$
837,435

 
 
 
 
 
Total by member class:
 
 
 
 
CFC:
 
 
 
 
Distribution
 
$
243,668

 
$
235,919

Power supply
 
533,168

 
586,717

Statewide and associate
 
5,296

 
4,708

CFC total
 
782,132

 
827,344

NCSC
 
12,591

 
8,517

RTFC
 

 
1,574

Total
 
$
794,723

 
$
837,435

____________________________ 
(1)Represents the outstanding principal amount of long-term fixed-rate and variable-rate guaranteed bonds.
(2)Reflects our maximum potential exposure for letters of credit.


84





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Long-term tax-exempt bonds of $309 million and $312 million as of November 30, 2019 and May 31, 2019, respectively, included $245 million and $247 million, respectively, of adjustable or variable-rate bonds that may be converted to a fixed rate as specified in the applicable indenture for each bond offering. We are unable to determine the maximum amount of interest that we may be required to pay related to the remaining adjustable and variable-rate bonds. Many of these bonds have a call provision that allows us to call the bond in the event of a default, which would limit our exposure to future interest payments on these bonds. Our maximum potential exposure generally is secured by mortgage liens on the members’ assets and future revenue. If a member’s debt is accelerated because of a determination that the interest thereon is not tax-exempt, the member’s obligation to reimburse us for any guarantee payments will be treated as a long-term loan. The remaining long-term tax-exempt bonds of $64 million as of November 30, 2019 are fixed-rate. The maximum potential exposure for these bonds, including the outstanding principal of $64 million and related interest through maturity, totaled $89 million as of November 30, 2019. The maturities for long-term tax-exempt bonds and the related guarantees extend through calendar year 2042.

Of the outstanding letters of credit of $339 million and $379 million as of November 30, 2019 and May 31, 2019, respectively, $109 million and $126 million, respectively, were secured. We did not have any letters of credit outstanding that provided for standby liquidity for adjustable and floating-rate tax-exempt bonds issued for the benefit of our members as of November 30, 2019. The maturities for the outstanding letters of credit as of November 30, 2019 extend through calendar year 2039.

In addition to the letters of credit listed in the table above, under master letter of credit facilities in place as of November 30, 2019, we may be required to issue up to an additional $54 million in letters of credit to third parties for the benefit of our members. All of our master letter of credit facilities were subject to material adverse change clauses at the time of issuance as of November 30, 2019. Prior to issuing a letter of credit, we would confirm that there has been no material adverse change in the business or condition, financial or otherwise, of the borrower since the time the loan was approved and confirm that the borrower is currently in compliance with the letter of credit terms and conditions.

The maximum potential exposure for other guarantees was $147 million as of both November 30, 2019 and May 31, 2019 of which $25 million was secured as of both November 30, 2019 and May 31, 2019. The maturities for these other guarantees listed in the table above extend through calendar year 2025. Guarantees under which our right of recovery from our members was not secured totaled $352 million and $374 million and represented 44% and 45% of total guarantees as of November 30, 2019 and May 31, 2019, respectively.

In addition to the guarantees described above, we were also the liquidity provider for $245 million of variable-rate tax-exempt bonds as of November 30, 2019, issued for our member cooperatives. While the bonds are in variable-rate mode, in return for a fee, we have unconditionally agreed to purchase bonds tendered or put for redemption if the remarketing agents are unable to sell such bonds to other investors. We were not required to perform as liquidity provider pursuant to these obligations during the six months ended November 30, 2019 or the prior fiscal year.

Guarantee Liability

As of November 30, 2019 and May 31, 2019, we recorded a guarantee liability of $13 million and $14 million, respectively, which represents the contingent and noncontingent exposures related to guarantees and liquidity obligations. The contingent guarantee liability was $1 million as of both November 30, 2019 and May 31, 2019, based on management’s estimate of exposure to losses within the guarantee portfolio. The remaining balance of the total guarantee liability of $12 million and $13 million as of November 30, 2019 and May 31, 2019, respectively, relates to our noncontingent obligation to stand ready to perform over the term of our guarantees and liquidity obligations that we have entered into or modified since January 1, 2003.

85





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 12—FAIR VALUE MEASUREMENT

We use fair value measurements for the initial recording of certain assets and liabilities and periodic remeasurement of certain assets and liabilities on a recurring or nonrecurring basis. The accounting guidance for fair value measurements and disclosures establishes a three-level fair value hierarchy that prioritizes the inputs into the valuation techniques used to measure fair value. The levels of the fair value hierarchy, in priority order, include Level 1, Level 2 and Level 3. For additional information regarding the fair value hierarchy and a description of the methodologies we use to measure fair value, see “Note 14—Fair Value Measurement” to the Consolidated Financial Statements in our 2019 Form 10-K.

The following tables present the carrying value and fair value for all of our financial instruments, including those carried at amortized cost, as of November 30, 2019 and May 31, 2019. The tables also display the classification within the fair value hierarchy of the valuation technique used in estimating fair value.

 
 
November 30, 2019
 
Fair Value Measurement Level
(Dollars in thousands)
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
114,033

 
$
114,033

 
$
114,033

 
$

 
$

Restricted cash
 
10,638

 
10,638

 
10,638

 

 

Equity securities
 
63,809

 
63,809

 
63,809

 

 

Debt securities held-to-maturity
 
573,547

 
583,439

 

 
583,439

 

Deferred compensation investments
 
5,682

 
5,682

 
5,682

 

 

Loans to members, net
 
26,421,661

 
28,008,555

 

 

 
28,008,555

Accrued interest receivable
 
130,950

 
130,950

 

 
130,950

 

Debt service reserve funds
 
17,151

 
17,151

 
17,151

 

 

Derivative assets
 
53,174

 
53,174

 

 
53,174

 

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
4,789,024

 
$
4,789,768

 
$

 
$
4,639,768

 
$
150,000

Long-term debt
 
18,434,451

 
19,783,264

 

 
11,153,207

 
8,630,057

Accrued interest payable
 
148,875

 
148,875

 

 
148,875

 

Guarantee liability
 
13,489

 
13,763

 

 

 
13,763

Derivative liabilities
 
591,027

 
591,027

 

 
591,027

 

Subordinated deferrable debt
 
986,026

 
1,052,215

 

 
1,052,215

 

Members’ subordinated certificates
 
1,355,052

 
1,355,052

 

 

 
1,355,052



86





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
May 31, 2019
 
Fair Value Measurement Level
(Dollars in thousands)
 
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
177,922

 
$
177,922

 
$
177,922

 
$

 
$

Restricted cash
 
8,282

 
8,282

 
8,282

 

 

Equity securities
 
87,533

 
87,533

 
87,533

 

 

Debt securities held-to-maturity
 
565,444

 
570,549

 

 
570,549

 

Deferred compensation investments
 
4,984

 
4,984

 
4,984

 

 

Loans to members, net
 
25,899,369

 
25,743,503

 

 

 
25,743,503

Accrued interest receivable
 
133,605

 
133,605

 

 
133,605

 

Debt service reserve funds
 
17,151

 
17,151

 
17,151

 

 

Derivative assets
 
41,179

 
41,179

 

 
41,179

 

 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Short-term borrowings
 
$
3,607,726

 
$
3,608,259

 
$

 
$
3,608,259

 
$

Long-term debt
 
19,210,793

 
20,147,183

 

 
11,482,715

 
8,664,468

Accrued interest payable
 
158,997

 
158,997

 

 
158,997

 

Guarantee liability
 
13,666

 
13,307

 

 

 
13,307

Derivative liabilities
 
391,724

 
391,724

 

 
391,724

 

Subordinated deferrable debt
 
986,020

 
1,004,707

 

 
1,004,707

 

Members’ subordinated certificates
 
1,357,129

 
1,357,129

 

 

 
1,357,129


Transfers Between Levels

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changes in the valuation technique used, are generally the cause of transfers between levels. We did not have any transfers between levels for financial instruments measured at fair value on a recurring basis for the six months ended November 30, 2019 and 2018.

Recurring Fair Value Measurements

The following table presents the carrying value and fair value of financial instruments reported in our condensed consolidated financial statements at fair value on a recurring basis as of November 30, 2019 and May 31, 2019, and the classification of the valuation technique within the fair value hierarchy.
 
 
November 30, 2019
 
May 31, 2019
(Dollars in thousands)
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
Equity securities
 
$
63,809

 
$

 
$
63,809

 
$
87,533

 
$

 
$
87,533

Deferred compensation investments
 
5,682

 

 
5,682

 
4,984

 

 
4,984

Derivative assets
 

 
53,174

 
53,174

 

 
41,179

 
41,179

Derivative liabilities
 

 
591,027

 
591,027

 

 
391,724

 
391,724





87





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Nonrecurring Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis on our condensed consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as in the application of lower of cost or fair value accounting or when we evaluate for impairment. Assets measured at fair value on a nonrecurring basis and still held during the six months ended November 30, 2019 and 2018 consisted of certain impaired loans. Fair value measurement adjustments for individually impaired loans are recorded in the provision for loan losses on our condensed consolidated statements of operations. The fair value of these assets is determined based on the use of significant unobservable inputs, which are considered Level 3 in the fair value hierarchy. We did not have any nonrecurring fair value measurement adjustments recorded in earnings attributable to these assets during the three and six months ended November 30, 2019 and 2018.

Significant Unobservable Level 3 Inputs

Impaired Loans

The fair value of impaired loans is typically measured based on the present value of expected future cash flows. Our estimate of expected future cash flows incorporates, among other items, assumptions regarding default rates, loss severities, the amounts and timing of prepayments, as well as the characteristics of the loan. If we expect repayment to be provided solely by the continued operation or sale of the underlying collateral, the fair value of the collateral less estimated costs to sell is used as the basis for measuring fair value. We employ various approaches and techniques to determine the fair value of collateral-dependent loans, including developing market multiples and obtaining valuations from third-party specialists. The significant unobservable inputs used in measuring the fair value of collateral-dependent loans include estimated cash flows before interest, taxes, depreciation and amortization and market multiples for comparable companies. Our Credit Risk Management group reviews the unobservable inputs to assess the reasonableness of the assumptions used and the accuracy of the work performed. We did not have any impaired collateral-dependent loans as of November 30, 2019 or May 31, 2019.

88





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 13—BUSINESS SEGMENTS

The following tables display segment results for the three and six months ended November 30, 2019 and 2018, and assets attributable to each segment as of November 30, 2019 and November 30, 2018.
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2019
(Dollars in thousands)
 
CFC
 
Other
 
Elimination
 
Consolidated Total
Statement of operations:
 
 
 
 
 
 
 
 
Interest income
 
$
285,036

 
$
11,719

 
$
(9,718
)
 
$
287,037

Interest expense
 
(207,759
)
 
(9,830
)
 
9,718

 
(207,871
)
Net interest income
 
77,277

 
1,889

 

 
79,166

Benefit for loan losses
 
1,045

 

 

 
1,045

Net interest income after benefit for loan losses
 
78,322

 
1,889

 

 
80,211

Non-interest income:
 
 
 
 
 
 
 
 
Fee and other income
 
5,181

 
587

 
(1,926
)
 
3,842

Derivative gains (losses):
 
 
 
 
 
 
 
 
Derivative cash settlements expense
 
(13,874
)
 
(276
)
 

 
(14,150
)
Derivative forward value gains
 
196,387

 
1,213

 

 
197,600

Derivative gains
 
182,513

 
937

 

 
183,450

Unrealized losses on equity securities
 
(114
)
 

 

 
(114
)
Total non-interest income
 
187,580

 
1,524

 
(1,926
)
 
187,178

Non-interest expense:
 
 
 
 
 
 
 
 
General and administrative expenses
 
(23,994
)
 
(2,420
)
 
1,645

 
(24,769
)
   Losses on early extinguishment of debt
 

 
(614
)
 

 
(614
)
Other non-interest expense
 
(316
)
 
(280
)
 
281

 
(315
)
Total non-interest expense
 
(24,310
)
 
(3,314
)
 
1,926

 
(25,698
)
Income before income taxes
 
241,592

 
99

 

 
241,691

Income tax expense
 

 
(91
)
 

 
(91
)
Net income
 
$
241,592

 
$
8

 
$

 
$
241,600

 
 
 
 
 
 
 
 
 

89





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended November 30, 2018
(Dollars in thousands)
 
CFC
 
Other
 
Elimination
 
Consolidated Total
Statement of operations:
 
 
 
 
 
 
 
 
Interest income
 
$
279,033

 
$
12,945

 
$
(10,725
)
 
$
281,253

Interest expense
 
(203,985
)
 
(10,906
)
 
10,725

 
(204,166
)
Net interest income
 
75,048

 
2,039

 

 
77,087

Benefit for loan losses
 
1,788

 

 

 
1,788

Net interest income after benefit for loan losses
 
76,836

 
2,039

 

 
78,875

Non-interest income:
 
 
 
 
 
 
 

Fee and other income
 
4,897

 
490

 
(1,792
)
 
3,595

Derivative gains (losses):
 
 
 
 
 
 
 


Derivative cash settlements
 
(11,546
)
 
(259
)
 

 
(11,805
)
Derivative forward value gains
 
74,591

 
557

 

 
75,148

Derivative gains
 
63,045

 
298

 

 
63,343

Unrealized losses on equity securities
 
(1,619
)
 

 

 
(1,619
)
Total non-interest income
 
66,323

 
788

 
(1,792
)
 
65,319

Non-interest expense:
 
 
 
 
 
 
 

General and administrative expenses
 
(23,544
)
 
(1,919
)
 
1,593

 
(23,870
)
Other non-interest expense
 
(355
)
 
(199
)
 
199

 
(355
)
Total non-interest expense
 
(23,899
)
 
(2,118
)
 
1,792

 
(24,225
)
Income before income taxes
 
119,260

 
709

 

 
119,969

Income tax expense
 

 
(243
)
 

 
(243
)
Net income
 
$
119,260

 
$
466

 
$

 
$
119,726

 
 
 
 
 
 
 
 
 

90





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Six Months Ended November 30, 2019
(Dollars in thousands)
 
CFC
 
Other
 
Elimination
 
Consolidated Total
Statement of operations:
 
 
 
 
 
 
 
 
Interest income
 
$
573,000

 
$
24,066

 
$
(20,014
)
 
$
577,052

Interest expense
 
(420,894
)
 
(20,262
)
 
20,014

 
(421,142
)
Net interest income
 
152,106

 
3,804

 

 
155,910

Benefit for loan losses
 
1,015

 

 

 
1,015

Net interest income after benefit for loan losses
 
153,121

 
3,804

 

 
156,925

Non-interest income:
 
 
 
 
 
 
 
 
Fee and other income
 
17,463

 
8,408

 
(11,088
)
 
14,783

Derivative losses:
 
 
 
 
 
 
 
 
Derivative cash settlements expense
 
(24,675
)
 
(518
)
 

 
(25,193
)
Derivative forward value losses
 
(186,375
)
 
(707
)
 

 
(187,082
)
Derivative losses
 
(211,050
)
 
(1,225
)
 

 
(212,275
)
Unrealized gains on equity securities
 
1,506

 

 

 
1,506

Total non-interest income
 
(192,081
)
 
7,183

 
(11,088
)
 
(195,986
)
Non-interest expense:
 
 
 
 
 
 
 
 
General and administrative expenses
 
(48,733
)
 
(4,655
)
 
3,290

 
(50,098
)
  Losses on early extinguishment of debt
 

 
(614
)
 

 
(614
)
Other non-interest (expense) income
 
6,863

 
(7,797
)
 
7,798

 
6,864

Total non-interest expense
 
(41,870
)
 
(13,066
)
 
11,088

 
(43,848
)
Loss before income taxes
 
(80,830
)
 
(2,079
)
 

 
(82,909
)
Income tax benefit
 

 
430

 

 
430

Net loss
 
$
(80,830
)
 
$
(1,649
)
 
$

 
$
(82,479
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 30, 2019
 
 
CFC
 
Other
 
Elimination
 
Consolidated Total
Assets:
 
 
 
 
 
 
 
 
Total loans outstanding
 
$
26,406,139

 
$
1,058,603

 
$
(1,037,863
)
 
$
26,426,879

Deferred loan origination costs
 
11,302

 

 

 
11,302

Loans to members
 
26,417,441

 
1,058,603

 
(1,037,863
)
 
26,438,181

Less: Allowance for loan losses
 
(16,520
)
 

 

 
(16,520
)
Loans to members, net
 
26,400,921

 
1,058,603

 
(1,037,863
)
 
26,421,661

Other assets
 
1,132,171

 
106,301

 
(93,532
)
 
1,144,940

Total assets
 
$
27,533,092

 
$
1,164,904

 
$
(1,131,395
)
 
$
27,566,601


91





NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Six Months Ended November 30, 2018
(Dollars in thousands)
 
CFC
 
Other
 
Elimination
 
Consolidated Total
Statement of operations:
 
 
 
 
 
 
 
 
Interest income
 
$
555,276

 
$
25,929

 
$
(21,461
)
 
$
559,744

Interest expense
 
(414,035
)
 
(21,823
)
 
21,461

 
(414,397
)
Net interest income
 
141,241

 
4,106

 

 
145,347

Benefit for loan losses
 
1,897

 

 

 
1,897

Net interest income after benefit for loan losses
 
143,138

 
4,106

 

 
147,244

Non-interest income:
 
 
 
 
 
 
 
 
Fee and other income
 
10,096

 
1,054

 
(3,644
)
 
7,506

Derivative gains (losses):
 


 


 


 


Derivative cash settlements expense
 
(24,108
)
 
(526
)
 

 
(24,634
)
Derivative forward value gains
 
94,262

 
898

 

 
95,160

Derivative gains
 
70,154

 
372

 

 
70,526

Unrealized losses on equity securities
 
(2,345
)
 

 

 
(2,345
)
Total non-interest income
 
77,905

 
1,426

 
(3,644
)
 
75,687

Non-interest expense:
 
 
 
 
 
 
 
 
General and administrative expenses
 
(45,969
)
 
(4,293
)
 
3,187

 
(47,075
)
Losses on early extinguishment of debt
 
(7,100
)
 

 

 
(7,100
)
Other non-interest expense
 
(749
)
 
(457
)
 
457

 
(749
)
Total non-interest expense
 
(53,818
)
 
(4,750
)
 
3,644

 
(54,924
)
Income before income taxes
 
167,225

 
782

 

 
168,007

Income tax expense
 

 
(303
)
 

 
(303
)
Net income
 
$
167,225

 
$
479

 
$

 
$
167,704

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
November 30, 2018
 
 
CFC
 
Other
 
Elimination
 
Consolidated Total
Assets:
 
 
 
 
 
 
 
 
Total loans outstanding
 
$
25,250,000

 
$
1,122,718

 
$
(1,089,765
)
 
$
25,282,953

Deferred loan origination costs
 
11,222

 

 

 
11,222

Loans to members
 
25,261,222

 
1,122,718

 
(1,089,765
)
 
25,294,175

Less: Allowance for loan losses
 
(16,904
)
 

 

 
(16,904
)
Loans to members, net
 
25,244,318

 
1,122,718

 
(1,089,765
)
 
25,277,271

Other assets
 
1,542,099

 
112,923

 
(102,535
)
 
1,552,487

Total assets
 
$
26,786,417

 
$
1,235,641

 
$
(1,192,300
)
 
$
26,829,758



92



Item 3.
Quantitative and Qualitative Disclosures About Market Risk

For quantitative and qualitative disclosures about market risk, see “Part I—Item 2. MD&A—Market Risk” and “Note 9—Derivative Instruments and Hedging Activities.”

Item 4.
Controls and Procedures

As of the end of the period covered by this report, senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting that occurred during the three months ended November 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, CFC is subject to certain legal proceedings and claims in the ordinary course of business, including litigation with borrowers related to enforcement or collection actions. Management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, liquidity or results of operations. CFC establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Accordingly, no reserve has been recorded with respect to any legal proceedings at this time.

Item 1A.
Risk Factors

Refer to “Part I— Item 1A. Risk Factors” in our 2019 Form 10-K for information regarding factors that could affect our results of operations, financial condition and liquidity. We are not aware of any material changes in the risk factors set forth under “Part I— Item 1A. Risk Factors” in our 2019 Form 10-K.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.
Defaults Upon Senior Securities

Not applicable.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None.

93



Item 6. Exhibits

The following exhibits are incorporated by reference or filed as part of this Report.


EXHIBIT INDEX
Exhibit No.
 
Description
10.1*
10.2*
31.1*
31.2*
32.1†
32.2†
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Calculation Linkbase Document
101.LAB*
XBRL Taxonomy Label Linkbase Document
101.PRE*
XBRL Taxonomy Presentation Linkbase Document
101.DEF*
XBRL Taxonomy Definition Linkbase Document
____________________________ 
*Indicates a document being filed with this Report.
Indicates a document that is furnished with this Report, which shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.

94



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


NATIONAL RURAL UTILITIES
COOPERATIVE FINANCE CORPORATION
 
Date: January 13, 2020                     
By:
/s/ J. ANDREW DON
 
J. Andrew Don
 
Senior Vice President and Chief Financial Officer
                                
    
By:
 /s/ ROBERT E. GEIER
 
Robert E. Geier
 
Controller and Principal Accounting Officer
        






95